eBay: Q3 Looks Good but Q4 Guidance Disappoints

eBay (EBAY) reported third quarter earnings on Wednesday after the close and while the third quarter was okay, its fourth quarter guidance was well below Wall Street estimates (EBAY 3Q Earnings Release).

The company guided to EPS between $0.39 and $0.41 and revenues of between $2.020 billion and $2.170 billion while analysts were looking for EPS of $0.47 on $2.43 billion in revenues.  Therefore, it is way under here.

The stock was down almost 14% in the regular session and was beaten down even more in the after hours - down another 3% or so to around $14.80.

Its marketplace business is clearly deteriorating.  Gross Merchandise Volume [$], the amount of merchandise sold through eBay, declined by 1% compared to the year ago period - the first decline in the company’s history.  Net income growth slowed to 5% and is poised to go negative in the fourth quarter based on their guidance - the company earned $0.45 a share in last year’s fourth quarter.

However, the stock is RIDICULOUSLY CHEAP here.  The company has just under $4 of cash and short-term investments on its balance sheet, and no debt.  The balance sheet is clean as a whistle.  So, you’re paying $11 for the auction business and PayPal.  It is still guiding to EPS of between $1.69 and $1.71 for 2008.  That’s a 6.5 multiple!  Hello! 

Even if earnings decline 15% in 2009, that’s still only a 7.6 forward multiple.  If earnings are cut in half next year, which won’t happen, that’s a 13 multiple. 

There is a big margin of safety here.  I can’t think of a non-cyclical stock that’s as cheap as eBay.  This is the cheapest stock I am aware of, and it’s no wonder that legendary value shop Southeastern Asset Management owned 48.4 million shares of eBay at the end of the second quarter. This was when eBay was trading for more than $27 a share, which, at the time was a $1.3 billion position!

Even though its marketplace business is clearly suffering from internal problems and the weakening economy, this is still the #1 company in its space, with a fortress balance sheet, printing money quarter after quarter after quarter.  It’s too cheap here and I’d recommend it to anybody who understands value and is willing to hold on until the market starts giving it the valuation it deserves.

Disclosure: Top Gun is long shares of eBay.

Comments

[Tote:]

With eBay pumping half a billion $ into share repurchases each and every quarter, there is no way that EPS is going down anytime soon. EPS was a record high this quarter and will continue to increase even if overall revenue is flat or decreases.

2008 Oct 16 07:19 AM

[Bob C:]

It seems that eBay boosters never want to open its doors, and poke around inside. It's ugly in there, and getting uglier every day.
Enough has been posted about the reason for this, so I won't go there.
Suffice it to say that investing in eBay now, would be like investing in the White Star Line with the Titanic on its way down.
John Donahoe is eBay's iceberg.
Writing about how great a buy eBay appears to be, on paper, will not bring back your 'long' lost investment. Last November $40 a share, this past September (before the recent 'crash') trading for $19 to $20, now around $15.
Hmmmm...Lets blame it all on the economy!

2008 Oct 16 07:42 AM

[Former Ebay...:]

If one were to look at ebay's numbers more closely they would see how inaccurate they are.
They would run end of quarter "sales" to boost their numbers and then would credit back part of the listing fees the next quarter. This was just one of their tools to boost their numbers.
Who knows what they are doing internally. Didn't I see another article stating their numbers were not GAAP? GAAP stands for Generally Accepted Accounting Principles.
This should sent up red flags to anyone looking at ebay's figures.

2008 Oct 16 07:58 AM

[Dinah Balk:]

Blame IT on the economy? Not in this lifetime!
The blame needs to be placed on Donahoe where it belongs.

1. He destroyed eBay's SEARCH FUNCTION so finding IT is like trying to find a needle in a haystack 10 feet tall.

2. He capped shipping fees for media items so low that they don't even cover seller's actual costs.

3. He "lowered" listing fees by doubling final value fees.

4. Paypal is now mandatory for all sellers who don't have merchant accounts. Checks & money orders are banned.

5. The number of listings no longer reflect actual paid listings because buy.com & a few other diamond powersellers pay little if any listing fees.

6. Nothing works on the site due to constant changes & bad script. This includes shipping calculator, the sell your item form, markdown manager, etc. etc. etc. Many pages won't even load!

7. He drove buyers & sellers off the site with excessive advertising in direct competition with eBay's sellers.

8. Buyers & sellers are constantly being opted into guinea pig tests from which there is no escape.

9. Bill Me Later is inappropriate for eBay sales because it opens the door to chargebacks due to nonpayment & I suspect this cost will be passed onto sellers.

10. Last but not least Donahoe is directly responsible for eBay having to defend itself in an antitrust lawsuit (Malone vs. eBay) for violation of the Sherman Act and Paypal defending itself in Mehmet vs. Paypal due to FALSE POSITIVES that automatically hold sellers funds.

So is eBay a good bargin? I don't think so, not even at $1.00/share. Any company that allows its CEO to implement changes that make no sense and destroy a company piece by piece isn't worth anything.

2008 Oct 16 09:12 AM

[Bob C:]

Well Greg, I hope investors weren't waiting, with money in hand to buy eBay shares at market's open today, after reading your advice.
So much for $1.7 EPS when shares are already down about $1.40.
And the day is young!

2008 Oct 16 11:10 AM