By Matt Doiron
eBay Inc. (EBAY) is up 74% since a year ago, with a remarkably steady increase in its stock price over that time, and is now valued at a market capitalization of almost $75 billion. In the fourth quarter of 2012, eBay experienced an 18% increase in revenue compared to the same period in 2011. The growth rate was particularly high in the Payments business, which includes Paypal and is now responsible for 36% of revenue. For the year as a whole, total sales for the company were up 20% so there seems to have been a slight deceleration but still a very strong performance on the top line. eBay has controlled the increase in operating expenses to the point that operating income was up 16% in Q4 2012 versus a year earlier. While on paper the earnings number was down, this was due to extraordinary nonoperating items in the third quarter of 2011, which caused net income to be abnormally high.
With the strong business and the rise in the stock price eBay now trades at 29 times trailing earnings, suggesting that the market expects its strong growth to continue. Wall Street analysts expect $2.74 in earnings per share in 2013 (which would make for a current-year P/E of 21) and $3.20 on a forward basis. That makes for a forward earnings multiple of only 18, and presumably if the company was on this trajectory some level of improvement would continue beyond that point. We would like to see a cheaper price in terms of historical performance, but the growth rates have been impressive and it may be worth considering eBay as a potential "growth at a reasonable price" stock.
Billionaire Stephen Mandel's Lone Pine Capital owned almost 13 million shares of eBay at the end of September (see Mandel's stock picks); Mandel is a Tiger Cub, having previously worked at legendary investor Julian Robertson's Tiger Management. Another Tiger Cub, Rob Citrone, manages Discovery Capital Management. That fund increased its stake in eBay by 62% during the third quarter of 2012 to a total of 5.5 million shares (check out more stocks Discovery was buying). SAC Capital Advisors, managed by billionaire Steve Cohen, was also buying shares of eBay during the quarter and closed September with 2.5 million shares in its portfolio (find Cohen's favorite stocks).
The closest peer for the e-commerce portion of eBay's business is Amazon.com, Inc. (AMZN). Amazon's profits are very low, and were actually strongly negative in the third quarter of last year. Consensus is for $1.48 per share this year, which implies a current-year P/E of 179. Bulls insist that the company is electing to focus on revenue growth and initiatives such as same-day delivery rather than immediate profitability, but we would still avoid the stock at that pricing.
We can also compare eBay to Visa Inc (V), Mastercard Inc (MA), and American Express Company (AXP), since we've observed that payments are a growth driver of its overall business and may become the primary source of revenue in the near future. The forward earnings multiples of Visa and Mastercard are in line with eBay's in the high teens. Mastercard stands out for having a trailing P/E of only 24, but that company - while it did see an extraordinarily high growth rate in earnings last quarter - has had modest revenue growth that significantly trails that at eBay and certainly trails the payments business. American Express carries trailing and forward P/Es of 15 and 11, respectively, but top-line growth has been very low there and its net income was actually down sharply in its most recent quarter compared with the same period in the previous year.
eBay is expensive in terms of its trailing earnings. However, we do see that it isn't much more expensive than its peers - if at all - and it certainly may be worth it to research the company to see if it can sustain its current growth rates. We would note that it would have to produce earnings growth in line with what it has done in recent quarters, for quite some time, in order to prove undervalued at the current price.