Seeking Alpha
Long/short equity, research analyst, tech, macro
Profile| Send Message| ()  

Introduction

eBay (EBAY) is a great investment going forward due to growth in its core businesses, improving economic conditions, and cost-cutting. The stock is likely to appreciate, due to its ingenious business model, and its ability to acquire businesses.

Qualitative Analysis

Source: Information pertaining to eBay came from the shareholder annual report, with additional information from the quarterly report.

eBay continues to optimize the website in order to remain competitive and as a result, global active accounts have grown by 13% on average throughout 2012. In the PayPal division, the net number of payments grew by 28-31% throughout the 3-quarters represented in the graph below.

(click to enlarge)

Total payment volume has grown by 15.66% (average) for eBay, while PayPal merchant services grew total payment volume by 24.66% (average) in 2012. These growth figures imply that eBay is still growing, and is making an effort to maintain competitiveness in the market place.

The company has authorized a program of repurchasing $2.0 billion in common stock to off-set the dilution caused by share-based compensation programs for its employees. This should help to smooth EPS figures over a long-time period. eBay can generate higher returns on capital by investing the capital back into its business, rather than rapidly retiring the shares through buy-backs. This can be proven with its recent acquisition in GSI.

(click to enlarge)

Capital expenditure has increased due to its acquisition of GSI commerce in 2011. The deal was worth ($2.4 billion), and is a segment that is dedicated to helping brick and mortar stores better compete and operate in the online web space.

(click to enlarge)

The GSI division has been able to grow revenues by 12% on average throughout 2012. The recent acquisition in GSI further establishes eBay's successful track record in its investment savvy. Over the past ten years, eBay has been exceptional at investing in unique investment opportunities (PayPal). Over the next 5-years, I anticipate eBay will be able to find lucrative business opportunities to acquire, adding another upside catalyst for the company going forward.

Overall I remain optimistic on eBay because of its ability to successfully buy-out companies, continued growth in its core business divisions, along with improving economic conditions internationally.

eBay competes with Amazon (AMZN), Visa (V), Master Card (MA), American Express (AXP), among others.

Technical Analysis

eBay has been a continuous up-trend since December 2011. The technical analysis indicates that eBay is in a long-term up-trend and is trading in a narrow upward channel.

(click to enlarge)

Source: Chart from freestockcharts.com

The stock is trading above the 20-, 50-, and 200- Day Moving Average. The stock is in a confirmed up-trend (higher highs and higher lows), the up-trend further supports my buy-thesis.

Notable support is $35.00, $40.00, and $47.50 per share. Notable resistance is $60.00, $70.00, and $74.00 per share.

Street Assessment

Analysts on a consensus basis have reasonable expectations for the company going forward.

Growth Est

EBAY

Industry

Sector

S&P 500

Current Qtr.

15.00%

42.80%

9.10%

9.10%

Next Qtr.

14.50%

54.30%

29.50%

14.60%

This Year

15.80%

13.00%

31.40%

7.20%

Next Year

16.60%

17.10%

-15.40%

12.80%

Past 5 Years (per annum)

6.55%

N/A

N/A

N/A

Next 5 Years (per annum)

14.56%

11.80%

14.25%

9.09%

Price/Earnings (avg. for comparison categories)

22.85

-44.61

-2.03

12.41

PEG Ratio (avg. for comparison categories)

1.57

-0.96

0.28

1.46

Source: Table and data from Yahoo Finance

Analysts on a consensus basis have a 5-year average growth rate forecast of 14.56% (based on the above table).

Earnings History

11-Dec

12-Mar

12-Jun

12-Sep

EPS Est

0.57

0.52

0.55

0.54

EPS Actual

0.6

0.55

0.56

0.55

Difference

0.03

0.03

0.01

0.01

Surprise %

5.30%

5.80%

1.80%

1.90%

Source: Table and data from Yahoo Finance

The average surprise percentage is 3.7% above analyst forecasted earnings over the past four quarters (based on the above table).

Forecast and History

Year

Basic EPS

P/E Multiple

2003

$ 0.33

97.91

2004

$ 0.59

98.59

2005

$ 0.79

54.71

2006

$ 0.80

37.59

2007

$ 0.26

127.65

2008

$ 1.37

10.19

2009

$ 1.85

12.72

2010

$ 1.38

20.17

2011

$ 2.50

12.13

2012

$ 2.88

17.72

Source: Table created by Alex Cho, data from shareholder annual report, and price history is from Yahoo Finance.

The EPS figure shows that throughout the 2003- 2006 period, the company was able to grow earnings. Throughout 2007 earnings contracted. The contraction in earnings was due to the great recession, but following the recession the company was able to grow earnings. The earnings in 2009 suddenly contracted due to an increase of $805 million in operating expense, but earnings have stabilized since.

(click to enlarge)

Source: Table created by Alex Cho, data from shareholder annual report

By observing the chart we can conclude that the business is cyclical and is affected by macroeconomics. Therefore the largest risk factor to eBay is the slowing of international gross domestic product growth. So as long as the global economy continues to grow, the company will generate reasonable returns over a 5-year time span based on the forecast below.

(click to enlarge)

Source: Forecast and table by Alex Cho

By 2018 I anticipate the company to generate $6.69 in earnings per share. This is because of growth in core businesses, business acquisitions, and improving economic outlook.

The forecast is proprietary, and below is a non-linear chart indicating the price of the stock over the next 5-years.

(click to enlarge)

Source: Forecast and chart by Alex Cho

Below is a price chart incorporating the past 10 years and the next 6 years. Detailing 16 years in pricing based on my forecast and price history on December 31st of each year.

(click to enlarge)

Source: Forecast and chart created by Alex Cho, data from shareholder annual report, and price history is from Yahoo Finance.

Investment Strategy

EBAY currently trades at $53.18. I have a price forecast of $73.86 for December 31st 2013. Generally undervalued stock will experience sudden rallies in order to fetch a reasonable premium relative to historic valuation, or growth. I factored that into my price forecast, making it an important component behind the sudden jump in stock valuation despite the reasonable improvement in anticipated earnings.

Short Term

Over the next twenty-four months, the stock is likely to appreciate from $53.18 to $73.86 per share. This implies 39% upside from current levels. The stock is in an up-trend, which further supports my investment thesis.

Investors should buy eBay at $53.18 and sell at $73.86 in order to pocket short-term gains of 39% during 2013 through 2014.

Long Term

The company is a great investment for the long-term. I anticipate EBAY to deliver upon the price and earnings forecast despite the risk factors (competition and economic environment). EBAY's primary upside catalyst is improving economics, successful acquisitions, growing revenues, and managing costs. I anticipate the company to deliver upon my forecasted price target of $149.20 by 2018. This implies a return of 180.5% by 2018. This is a phenomenal return.

A higher yielding investment opportunity albeit having higher risk is to buy the Jan 17, 2015 calls at the $55.00 strike. The call premiums trade at $9.75. The price forecast for the end of 2014 is $85.01. The rate of return if the calls expire at $85.01 is 208%, the option will break-even when the stock trades at $64.75.

The call premiums are cheap because investors who are short EBAY calls anticipate the stock to break out into new all-time highs, hence the more expensive premiums. Despite this fact, the risk to reward ratio on the option strategy remains high. The high-returns comes with moderate risk (5-year beta of 1.4)

eBay has a market capitalization of $68.8 billion; the added liquidity makes this an investment opportunity appropriate for larger institutions that require added liquidity.

Conclusion

eBay has a great track-record of buying out companies, plus its revenues and earnings continue to grow. What more is there to ask for?

The conclusion remains simple: buy eBay.

Source: Why eBay Will Trade At New All Time Highs In 2013