eBay (EBAY) probably doesn't need to be introduced anymore to investors, as the name is a 'household name' in lots of investors' portfolios.
As probably the largest internet auction company, the company is very well known all over the world and enjoys a dominant position in the internet auction sector. eBay's revenue increased by almost 54% in just two years as total revenue in 2012 came in at $14.1B, versus $9.2B in 2010. eBay expects to continue to grow and has provided a revenue guidance of $16B for 2013.
In this article, I'll briefly look back at the 2012 and Q1 2013 numbers, after which I'll focus on the longer-term outlook for the company, which will lead to my conclusion and investment thesis.
The 2012 financial numbers
For the entire year 2012, eBay posted a net profit of $2.61B on a revenues of $14.1B. The profit was a bit down from 2011, when the company made $3.3B in profit on $11.55B in revenues, but if you look at the non-GAAP numbers, the 2012 profit was almost 20% higher than the 2011 profit.
Although the company is currently trading at around 26 times the 2012 GAAP profit, it's still relatively decently priced, as eBay is one of the best examples of a growth company on the market.
Free cash flow in 2012 was approximately $2.6B from $3.8B generated operational cash flow, which is a pretty good result.
The Q1 2013 financial update
After releasing the FY 2012 numbers, eBay announced it expected net revenues of $3.6-3.75B and GAAP profit estimate of between $0.48 and $0.50/share for the first quarter. eBay's guidance was right on, as the company released results on the upper side of the guidance, announcing $3.75B in revenue and a $0.51/share profit. eBay also reiterated its FY 2013 profit guidance of $2.23-2.29/ share.
At a current share price of $50.74, eBay is trading at approximately 22 times the estimated profit for 2013. Whilst this might sound expensive, eBay is a cash flow growth stock, so let's have a look at the longer- term outlook for the company.
The company continues to be the mobile payment leader as PayPal handled almost $14B in payment volume in 2012, and this number is expected to increase by 40% to $20B this year. A year-on-year growth of 40% would be an exceptional achievement, and it shows how important PayPal is for eBay as a whole.
As we noticed in the financial statements of the previous years and Q1, the net margins are increasing and according to analyst expectations, they'll continue to do so. This table provides a schematic overview of the net profit margins from 2010 on towards 2015.
Net Profit Margin
eBay might look expensive based on the 2013 Price/Earnings ratio, but as the profit margins will improve, this company is something for investors with a longer investment horizon. The following table gives the analyst expectations for the next five years.
Expected EPS (USD)
The company currently keeps all accumulated earnings on its balance sheet, but I expect we will see a policy change within the next few years. As eBay will make a profit of roughly $5B in 2016 with an extremely robust balance sheet, I wouldn't be surprised if the management will return more cash to its shareholders. If eBay would pay out 50% of the NPAT as a dividend and use 25% for further share buybacks, the dividend per share from 2016 on might be close to $2, which would result in a 4% dividend yield.
As I expect the company to continue (and increase) its share buybacks, this number should go up year after year as not only will the profit increase, it'll also have to be divided over fewer shares which has an incremental effect on the dividend payout per share.
Investment thesis and strategy
In conclusion, eBay is an interesting company for people with a 5yr+ horizon, as I've got the impression this cash flow machine will continue to reward its shareholders. As I'm also aiming for a dividend later on, eBay might be a good investment for people who are looking for a growth stock which will distribute a part of its income amongst its shareholders.
I'm usually not very keen on buying companies with a double-digit price/earnings ratio, but eBay will be an exception. I am planning on buying the stock and writing put options. At this moment, Put 40's with an expiration date in January 2014 have a premium of $1.37/share, so if eBay is trading below $40/share by January 2014, I'll very likely be forced to buy the shares at an average price of $40-41.37 or $38.73/ share. If the share price is trading above $40/share, I can keep the option premium but will obviously not be assigned shares.
eBay isn't cheap right now, but every investor should keep the company on his/her watch list to dip their toes in when the markets are weak.