eBay: Is The Growth Real?

| About: eBay Inc. (EBAY)

eBay (NASDAQ:EBAY) has been a huge player in the online market for consumers. Though not as large as Amazon (NASDAQ:AMZN), eBay has been able to stay relevant, to say the least. The acquisition of PayPal has been huge and has boosted eBay to new heights. But is the growth real? Today, I want to take a look at eBay and see if its growth is the real deal. First, let's take a look at the one-year and three-year charts:

Click to enlarge images.

One-Year Chart

Source: Stockcharts.com.

Three-Year Chart

Source: Stockcharts.com.

On the one-year chart, we used the 20-day, 50-day and 200-day simple moving averages. We did this because it is a shorter time frame than that of the three-year chart. But it looks great. The chart is strong, with eBay finding strong support from the 50-day SMA and has not tested the 200-day SMA once.

The three-year chart is slightly more troubling. While the chart has recovered nicely in the last year, in 2011 eBay struggled mightily, violating the 200-day SMA many times over an eight-month time frame. Aside from that, eBay has been very strong and while it doesn't have the prettiest long-term chart, I still think it shows strength.

The next step is to really take a look at the growth. The best way to analyze a company's growth is by looking at the growth of revenues and earnings per share (EPS). The following two tables will do just that. First, we're going to take a look at eBay's revenues for the previous three years (2009-11), the current year estimates (2012), and the next two years based on estimates (2013-14):

Revenues in Millions



Change In Revenues ($)

Change In Revenues (%)

























(*) = Indicates that these are estimates for the fiscal years of 2012, 2013 and 2014.

Earnings Per Share


Earnings Per Share

Change in EPS ($)

Change In EPS (%)

























(*) = Indicates that these are estimates for the fiscal years of 2012, 2013 and 2014.

After looking at the two tables above, there is a lot of information to digest. First, looking at revenues, we can see that eBay has been growing rapidly since 2010. Before that, revenues were extremely low, only growing 2.2% and 4.9% in 2009 and 2010, respectively. I expect revenues to continue increasing, but slightly more than the estimates have called for.

Turning to EPS growth, the picture gets a little fuzzier. Growth has been anything but consistent, as it has been negative in two of the past six years and had one year with 80% growth. This is something that we don't typically like to see, however, there are exceptions.

I think this would be a bigger problem if eBay had an overly inflated P/E ratio. The P/E ratio alone does not tell much of a story, but can aid a potential investor when searching for proper investments. eBay is currently trading with a 2012 P/E ratio of 22.5. Typically, we'd like to see this a little lower, but seeing the 2013 and 2014 P/E ratios is a bit more comforting. eBay trades with 2013 P/E ratio of 19.3 and a 2014 P/E ratio of 16.7. These levels are more reasonable, especially if eBay is able to grow both revenues and earnings per share at the respected estimates.

To take the P/E ratio one step further, we're going to analyze the PEG ratio. The PEG ratio shows us the growth, relative to the valuation (P/E ratio). A reading of 1 is considered fair value, under 1 is considered undervalued and a reading over 1 is considered overvalued. The PEG ratio is equated by dividing the P/E ratio by the EPS growth. Let's look at the 2013 PEG ratio:

19.3 (2013 P/E ratio) / 16.5 (estimated annual EPS growth) = 1.16

A PEG ratio of 1.16 would suggest that eBay is slightly overvalued. It doesn't imply that owning or purchasing the stock is bad, just that it may be slightly overpriced when considering next year's future growth. A quick look at Yahoo Finance will show a five-year PEG measurement of 1.57, again suggesting the stock is a little overvalued. However, if growth is stronger than the estimates, these figures will come down, as the price will better fit future earnings. It's also important to remember investors are paying up for the growth. It's an extreme rarity to find a growth stock with a low P/E or PEG ratio.

So what's the big catalyst for eBay? That's easy, PayPal! Paypal revs are up 23% when compared to that of last year. With such a strong increase, it now accounts for 40% of eBay's revenue, with nearly $1.4 billion in the third quarter. 2012 has been a year of experimenting when it comes to the use of offline PayPal. To gain more insight on the Paypal unit, here's what John Donahoe, the CEO, had to say during the most recent conference call:

PayPal's global reach is a competitive advantage. For the fourth consecutive quarter, more than half of PayPal's revenue came from outside the U.S. and PayPal Mobile also continued its strong momentum in Q3, and we expect to do over $10 billion of mobile payments volume in 2012. Consumers are choosing PayPal Mobile because it offers a unique, easy and safe way to pay on a mobile device. And merchants are finding that putting PayPal on their mobile experiences drives higher checkout conversion and higher sales. In fact, according to a commissioned study completed in July, 35% of all mobile sales completed with PayPal Mobile Express Checkout were incremental.

So PayPal intends to be everywhere consumers need an easy, safe, secure way to pay: online, from your phone, at your favorite neighborhood store and at major retailers. We've said that 2012 is a test-and-learn year for PayPal offline, and we feel good about what we've accomplished thus far. 10 major U.S. retailers now have PayPal live in-store at more than 7,000 locations. And we expect to have 20 major retailers signed up for PayPal's point-of-sale solution by year end. And in Q3, we announced our partnership with Discover, which will provide PayPal with access to more than 7 million merchant locations in the U.S. beginning next spring.

Personally, I recently started using PayPal Mobile for payments with other people. Simply put: I love it. It's quick, it's easy, and I can do it from my phone. I think that as this service continues to grow, it could eventually be eBay's biggest revenue generator, (currently eBay's Marketplace is the biggest revenue generator). As more and more people adapt to its simplicity, I think they will use it more between themselves and with merchants.

While I really like eBay, I question its value compared to the growth it will be able to generate. I think that over the next several years, we will see more growth than the projections suggest, but perhaps not enough to validate such a high valuation. Still, I like the company and think the growth is worth paying up for right now. Investors should pay attention to the next couple of quarters to see if this growth still justifies the valuations. In my opinion, it currently does, but eBay will have to keep its numbers up, if it wants to keep its investors on board. I am bullish eBay, and will look to add when the stock retreats to around $50 per share, or its 50-day simple moving average.

Note: eBay reports fourth-quarter earnings Jan. 16, 2013. This report will include the results for the fiscal year 2012.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in EBAY over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.