EBay: Solid Investment, But Buy at the Right Time

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On Tuesday afternoon, the largest online auction marketplace servicer – eBay (NASDAQ:EBAY) — reported its first-quarter earnings figures. After rising during trading hours, the stock lost these gains and then some after reporting on weak forward guidance. The stock now trades at about $52.50 per share.

While the company reported a $2.3 billion loss due to a onetime tax loss, its numbers were generally quite strong.

EBay reported a 14 percent increase in revenues, which is impressive given this weak market environment. However, non-GAAP earnings only grew by 11 percent, which reflects the fact that the company’s fastest-growing business — PayPal — has lower operating margins than the rest of the company. From that standpoint, the margin contraction isn’t such a bad thing, and so long as PayPal continues to outpace the eBay marketplace, business margins should continue to contract.

But despite the fact that PayPal was the company’s fastest-growing business — 19 percent revenue growth year over year – the eBay marketplace business saw 10 percent revenue growth, which, again, is impressive considering the tepid retail landscape.

These figures are very encouraging. This is especially true considering eBay’s reasonable valuation. The stock trades at approximately 22 times trailing earnings. If the analyst estimates are correct, then the shares trade at 18 times 2014 earnings and just 16 times 2015 earnings.

Considering the company’s stable growth, led by its rapidly growing PayPal business, and strong profit margins, now seems to be a reasonable time to take a position in eBay shares. While eBay isn’t the leading e-commerce company, it does own the leading e-payment platform in PayPal. Furthermore, eBay’s auction marketplace has transformed radically in order to compete with Amazon. Now, it serves as a platform for individuals and businesses to list items for sale without auctioning them off. Thus, like with Amazon (NASDAQ:AMZN), you can purchase virtually anything you want off of eBay’s marketplace.

While Amazon may have some advantages regarding pricing and shipping options for returning customers (e.g., Amazon Prime), from an investment standpoint, eBay makes much more sense. Amazon has virtually no profits, as it spends all of its operating income on developing its distribution infrastructure. While this may be the right strategy, in order to invest in Amazon shares, you have to believe that at some point in the near future the company will generate profits.

With eBay you get slower revenue growth, but very strong profit margins exceeding 18 percent. This gives the company capital to buy back stock. Furthermore, eBay, unlike Amazon, is a leader in the cashless payment market, which is growing every year as people transact more frequently through the Internet or using credit and debit cards. In fact, PayPal now offers its members a PayPal debit card.

Given these points, eBay appears to be a solid investment, and the company’s first-quarter earnings release illustrates this. The weakness in the company’s shares after-hours suggests to me that we may see some near-term weakness. This would be a continuation of the downtrend we have seen in eBay shares since March. As a result, I wouldn’t buy eBay shares right away. I want to wait for the stock to hit a support level at around $48 to $50 per share before I start taking a position. However, if the stock breaks below these levels, it may continue to correct further, as there is no additional technical support until $40 per share or so.

Disclosure: Ben Kramer-Miller has no position in eBay or in any of the stocks mentioned in this article.

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