Does eBay Still Have Room to Run?

With shares of eBay Inc. (NASDAQ:EBAY) trading at around $53.18, is EBAY an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

The big news for eBay is that PayPal partnered with NCR Corp (NYSE:NCR). This will allow PayPal to make a smooth and highly effective expansion into the physical world via ATMs. In the very near future, PayPal will be accessible in 38 percent of all major restaurant chains, and in 50 percent of all major retail chains. This should lead to a substantial increase in revenue.

At the present time, there is a lot of optimism surrounding eBay. Actually, this is one of those situations where a company is well run, but the optimism gets so high that expectations are difficult to meet. For example, several investment banks have raised their price targets on eBay over the past two weeks. Canaccord Genuity raised its price target from $50 to $56. Evercore Partners raised its price target from $53 to $60. Credit Suisse was a lot more conservative, raising its price target from $49 to $50. The reasons given for price target increases included expansion in the Marketplace, rapid growth in PayPal, as well as improved transaction values and user engagement.

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eBay has a history of solid stock performance after earnings reports/conference calls. History does tend to repeat itself, but there are a few dangers here. One, as stated earlier, optimism is too high – there is nowhere to go but down. Two, eBay’s Forward P/E is 19.41. Three, you should never trade heading into earnings. If you have a long-term investment in eBay, then that’s a different story. It should be understood that a 6 to 8 percent swing in either direction is possible.

Let’s take a look at some important numbers for eBay.

E = Equity to Debt Ratio Is Strong

The debt-to-equity ratio and balance sheet for eBay are both strong.

Debt-To-Equity

Cash

Long-Term Debt

EBAY

0.23

$9.14 Billion

$4.52 Billion

AMZN

0.35

$5.25 Billion

$2.68 Billion

OSTK

0.80

$74.53 Million

$17.00 Million

 

T = Technicals on the Stock Chart Are Strong

eBay has outperformed the market by a wide margin over the past three years. It has also outperformed Amazon (NASDAQ:AMZN) and Overstock (NASDAQ:OSTK). The latter should be expected, but the former is impressive.

1 Month

Year-To-Date

1 Year

3 Year

EBAY

5.38%

4.06%

73.32%

131.90%

AMZN

9.55%

8.82%

53.01%

114.40%

OSTK

4.92%

2.87%

115.50%

15.91%

 

At $53.18, eBay is currently trading above all its averages.

50-Day SMA

50.57

100-Day SMA

49.44

200-Day SMA

45.06

 

E = Earnings and Revenue Have Been Impressive

Revenue has been steadily increasing since 2008. Earnings broke out of a tight range in 2011.

2007

2008

2009

2010

2011

Revenue ($)in billions

7.67

8.54

8.73

9.17

11.65

Diluted EPS ($)

0.25

1.36

1.83

1.36

2.46

 

When we look at last quarter on a YoY basis, we see a substantial increase in revenue and earnings.  

9/2011

12/2011

3/2012

6/2012

9/2012

Revenue ($)in billions

2.97

3.38

3.28

3.40

3.40

Diluted EPS ($)

0.37

1.51

0.44

0.53

0.45

 

T = Trends Support the Industry

Catalog & Mail Order Houses have been growing rapidly. The scary part is that they still seem to be in their early stages of growth. Ironically, while many traditional retailers are attempting to make a splash online, eBay is expanding into the traditional retail world and already making bigger waves – with much less effort. eBay finds itself in the right place at the right time.

Conclusion

eBay is a very solid company. Analysts seem to agree. There are 23 analysts on the Buy side, 12 analysts offering Hold recommendations, and there are zero analysts on the Sell side. eBay’s margins are phenomenal, and cash flow is strong. However, it’s a dangerous game to play with high expectations. There is too much room for disappointment. For that reason alone, eBay is currently a WAIT AND SEE.

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