Shares of eBay (EBAY) saw a post Thanksgiving boost on the back of positive shopping data and an upgrade from analysts at SunTrust.
Despite this short term momentum, I remain on the sidelines. The premium valuation of the business, combined with emerging competitive trends for PayPal might put long term pressure on the business.
SunTrust Is Bullish
Analyst Robert Peck at SunTrust is upgrading eBay from "Neutral" to "Buy". At the same time, Peck attached a $61 price target to the stock, suggesting some 21% upside from Friday's levels.
Peck notes that the upgrade comes after the correction in the stock price. eBay is off 15% from April's highs and down 1% year to date, giving investors a much better risk/reward entry point to his opinion.
On the back of this correction, consensus revenue estimates for 2015 are now below the low end of the guidance as laid out by the company on its 2013 analyst day. At the same time data from ChannelAdvisor suggests eBay had a strong holiday season, boosting the prospects for the fourth quarter which comes after a cautious tone on the conference call in the third quarter.
2015 revenues are now seen at $21.2 billion at SunTrust, which compares to the guidance of $21.5 to $23.5 billion as provided by eBay. The timing of the upgrade might be a bit awkward as SunTrust still expects eBay to re-adjust its official 2015 revenue guidance downwards. It would be surprising to my opinion to see the stock react favorably to a downwards revision to the guidance.
eBay ended its third quarter with some $13.0 billion in cash, equivalents an non-equity investments. Total debt held by eBay stands at $4.5 billion, resulting in a net cash position of some $8.5 billion.
Revenues for the first nine months of 2013 came in at $11.5 billion, which is up by 14.3% compared to the year before. Earnings rose by 7.9% to $2.00 billion.
At this pace, and given the outlook for the so-important fourth quarter, eBay is on track to report earnings of around $2.8 billion on revenues of $16 billion.
Trading around $52 per share, the market values eBay at $67 billion, or its operating assets around $59 billion. This values operating assets around 3.7 times annual revenues and 21 times annual earnings.
Despite the solid financial position, eBay does not pay a dividend at the moment.
Some Historical Perspective
eBay's share price has peaked nearly a decade ago at levels in their high-fifties. Shares fell all the way to levels in the low teens by 2009, but ever since have roughly quadrupled, re-testing all time high levels in the stock.
After setting highs of $58 in April of this year, shares have fallen back a bit to levels around $51 per share, resulting in roughly flat year to date returns.
Between 2009 and 2012, eBay has seen very decent growth as annual revenues have increased by a cumulative 60% to $14.1 billion. Earnings rose by merely 9% to $2.6 billion over this time frame. Notably revenues are expected to rise further in 2013, while earnings growth will be limited.
Investors are cheering on the back of the upgrade and promising transaction data for the so important shopping season. Yet investors have more concerns as the stock has failed to benefit from the strong market momentum at all this year. Top line revenue growth is slowing down, while earnings are not keeping pace with revenues.
PayPal is the huge driver behind growth with a user base of 137 million worldwide, resulting in third quarter payment volume of $44 billion for the quarter, as average users send or receive some $320 by PayPal a quarter. While the business is very lucrative, with average commissions of around 4% per transaction, It might see increased competition from the likes of Google (GOOG), Square, or other emerging payment businesses. To fortify its position in the field, eBay recently announced the $800 million acquisition of Braintree, boosting its mobile payment offerings. According to Techcrunch, PayPal saw growth of mobile payment volumes being up 115% for Thanksgiving compared to 2012.
The market place business moves along just fine as well, with 124 million customers, transacting for $18 billion worth's of goods over the past quarter, or nearly $150 per user for the period.
Back in October when eBay released its third quarter results, I last took a look at the company's prospects. The company essentially has two large platforms in PayPal and its namesake business, being partially complementary. The huge customer base is crucial in the fight to boost its "ecosystem" against other huge platforms like Amazon.com (AMZN), Google, and indirectly Facebook (FB) and Twitter (TWTR).
Despite these long term attractive prospects, eBay is seeing a deterioration in growth rates. Yet it remains committed to its long term target of $300 billion in Enabled Commerce Volume by 2015.
I have to reiterate my stance. I like the long term prospects of the business, yet increased competition for PayPal and a premium valuation make me a bit cautious, despite the very modest momentum this year. Therefore I remain on the sidelines.