eBay (NASDAQ: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.
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.
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.
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.
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 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.
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.
Analysts on a consensus basis have reasonable expectations for the company going forward.
Past 5 Years (per annum)
Next 5 Years (per annum)
Price/Earnings (avg. for comparison categories)
PEG Ratio (avg. for comparison categories)
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).
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
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.
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.
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.
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.
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.
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.
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.
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.