eBay Valuation Suggests a Reality Check but No Warning

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 |  Includes: AAPL, EBAY
by: Steven Bauer

EBAY, Inc. (NASDAQ:EBAY) has had and continues to have management that unfortunately continues to follow the marketplace but not lead in the marketplace. Like so many securities, in the short term they look great, but therein lies the problem. Short term is not why we invest. It is, however, why we trade. EBAY is simply not a stock to trade! It looks good but it is clearly not yet back to be the earnings and growth powerhouse of 2002 to 2004. With the projected strong earnings, that may be improving. Some may think that trading and growing from the early part of this decade to 2007 was positive. It has been very good, but I disagree, with several caveats.Between 2005 and 2009, the stock sank from $58 to $10, a loss of over 80%. This drop is of serious concern. Yes, the recovery from 2009, from $10 to the present price of $32 is impressive but nothing like the gains from 2002, (price $12) to 2004 (price $58). And yes it is a different company but these figures don’t lie. You will note in the chart below that earnings have also lagged. Price and earnings work together, but you already knew that.

This is inexcusable management and means something has been and is dreadfully wrong. That’s a heads-up and that ‘something’ must be its “management.” Yes, it has recovered to a current price of $32 and, like always, this price is made to ‘look good’ by Wall Street and the media, but facts are facts. For me, this company continues not to qualify as a “quality” firm. I need to see a few more positive quarters and a strong assault on a price of say $40 without a notable pull back. Keep in mind that there are other, often smaller, e-commerce companies that have produced a far better return on investment over the recent years and this past decade.

Earnings estimates on balance are positive for the near-term, but should be improving at a much stronger pace than they are currently. How the “Street” will reward or punish EBAY or any other company in the future is always questionable. It appears, according to comparative analytics, that the upside is quite limited and that the downside currently has more appeal. The ratio of EBAY’s price to earnings multiple to its five-year growth rate is negative and below the average of its peers and that is a concern.

My analytics, to a large degree, have to do with comparative analytics. Comparing EBAY with its peers and other similar capitalization/revenue producing companies in general, provides a clear and only modestly positive story.

Timely news includes the fact that projected earnings growth in the near-term are looking rather modest but more recent analyst opinions are dropping. EBAY, Inc. executives, directors and major shareholders are selling their stock on balance, which is a negative factor. Remember, these guys are super smart about what’s going on.

My analytic focus (to invest or not to invest) on any company is most heavily weighted on fundamentals. EBAY, Inc. appears to have the prospect of improving earnings in the longer- term. For me, this is just a warning (something to consider) prior to buying. For prudent investing, those earnings will have to remain strong over a quarter or two (or more) before I would consider it be a “wise investment”. EBAY does have a good international footprint. And PayPal is growing nicely. I need to see very good to excellent valuations before recommending an investment. There are few other communications companies that meet my criteria.

Fundamental Valuation Analytics Table (weighting 40%):

EBAY, Inc. Co. (EBAY) compared to Apple, Inc, (NASDAQ:AAPL)

Stock and Symbol

Approx. Current Price

My Target Price % Above (+) / Below (-) Current Price – Valuation is “Tweaked.”

One Year Projections from the next - - Bullish Inflection Point.

PEG

P/E

Forward P/E

Valuation Divergence (%)

(One - Year Projected to a Mean) from the next - - Bullish Inflection Point.

EBAY, Inc. (EBAY)

32.0

+ 10 to + 20%

1.95

23.5

14.9

58%

Comments: Obviously, this is an “excellent” valuation however not a corresponding top Target Price Projection. Valuations match/badly beats Apple quite well, so what is wrong? There is "Not Much" with the current Fundamentals but a lot with its Technical and Consensus Analysis. This is why it is wise to compare - frequently. This work/analytics is for you to consider possible taking positions at a future date. However, investing at this time may not be wise.

Apple, Inc. (AAPL)

358

+ 20 to + 40+%

0.72

18.9

13.0

31%

Comments: Obviously, this is a very good to “excellent” Valuation and Target Price Projection. When you do further Fundamental studies it looks even better. Add to that work, the Technical and Consensus Analysis and you have a conformation that AAPL is and remains a winner! This is why it is wise to compare - frequently. My work/analytics can be used for taking positions at a future date. However, investing at this time may not be wise.

Click to enlarge

Additional Related Comments:

In a bull market environment I always compare Apple, Inc. (OTC:APPL) with companies under consideration for investment. Apple is my - numero uno! I then do a quantitative rating for my weighted fundamental, technical, and consensus analysis. This yields a list of the top five percent of a large universe of companies that can compete with Apple for your investment dollar, and Apple is nearly always “excellent” across the board.

EBAY Rating: Fundamental: Excellent – but not convincing, Technical: Very Good - recently, Consensus: Good.

AAPL Rating: Fundamental: Excellent, Technical: Very Good, Consensus: Average.

Notes for the above table and for your information:

  • Fundamental valuation - Data in today’s marketplace requires me to look carefully at the numbers as being either realistic or creative. That’s because more recently, financial analysts are using new/funny math and have changed the criteria on basic valuation. This is producing many valuation data inconsistencies, so I have adopted an additional procedure that I call “tweaking the results." This procedure is sometimes needed to get me back to ‘realistic’ valuations. It requires having an eye on the short and intermediate-term company price movement, but is definitely not a part of my technical analysis. My valuations also consider the two-year - forward P/E data, but is not weighted heavily. Using this procedure produces very accurate analytics for decisions at bullish and bearish inflection points.
  • Most financial analysts determine the price target range by estimating a future earnings per share and then applying a price-to-earnings multiple, also known as the price earnings ratio. I prefer to calculate price targets (high / low) for both the current and next fiscal year by applying the stock's present multiple to the average analyst's estimates and following with some foxy "tweaking" of the results.
  • Further, I believe that there should be just two aspects of fundamental valuation. They are the now and the later, which translates to 1-2 years and more than three years but not 10 years. Obviously, the farther out we try to project earnings and cash flow, the more inaccurate the data becomes. That is why I do my valuations rather frequently, especially around times of anticipating inflection points.
  • PEGs: You will note that some of these companies are carrying high or sometimes negative PEG ratios. I consider the PEGs very important when deciding to take positions in a given security.

Since coming out of retirement in October 2007, I have witnessed a vast change in the valuation practices being offered by many financial analysts. The shenanigans and other accounting practice games were active before, but have now reached a new height of deception. The general public is often lazy about learning, and perhaps naive. The financial analysts know that these characteristics exist and now are taking advantage. It's simple: The average Investor is asking to be told that all is "ok,” so that is what they are being told.

The graphic below (click to enlarge) tells the earnings story very well for EBAY, Inc. and should be studied with a discerning mindset.

Click to enlarge

As for the financial statements, all look (“look” can be a deceiving word) very good. However, nothing appears positive or compelling. In summary, the operating income, net income and balance sheet all increased/improved, and appear to be on track.

Technical Thoughts/Analytics

(Weighting 35%)

The price activity for EBAY, Inc. continues to improve since the February 2009 lows at a very fine pace. These numbers (prices) are an important consideration before making an investment decision to buy or short any security!

EBAY, Inc. Co, Inc. price targets are not all that compelling at this time.

For a current (up to the minute) chart of EBAY & AAPL, click here and scroll down.

My current marketplace position is: I am waiting for this current rally to run its course and am focused on identification of the next bearish inflection point. For EBAY, Inc. it is pretty much the same story.

Notes for My Technical Work:

Investing Wisely: This means taking long positions in companies and ETFs that have at or around Bullish Inflection Points. And just the opposite at Bearish Inflection Points.

Trading Wisely: This means taking long positions in high momentum/relative strength companies and ETFs during Bullish time frames – on dips. And just the opposite during Bearish time frames.

Consensus Thoughts/Analytics

(Weighting 25%)

Consensus analysis for me is very important. Please note the high percentage weighting I use. There is an old saying: If the Street does not like the company, don’t buy it.

My consensus rankings for EBAY, Inc. is “Good.”

So for this old bearish fox, I’m very pleased with the fundamental statistics/indicators, love my technical charts and my consensus work is simply right on.

Economic Note

Economically speaking there is always a concern or question as to what the U. S. Federal Reserve Board may or may not do regarding the management of the economy. We do know that rallies have come when the Fed injects capital or fiscal stimulus into the economic system, but that is becoming an "old news" factor.

We do know that there is a great deal of hype that the economy is improving, but when you explore the numbers over a longer time frame, there is much to be concerned about.

How this plays out over the coming few years, for me, is quite problematic.

Summary:

EBAY is an excellent example of what can happen if management does not lead in its industry and perhaps loses control.

The general market is currently overvalued and overbought with overly aggressive investors and interest rates on the rise. That is or should be a concern for EBAY. Like EBAY, the marketplace is showing signs of deterioration, especially in the area of breadth. This means that you must consider holding cash or perhaps taking bearish positions, not necessarily in EBAY

My focus is “investing wisely”, e.g. taking advantage of the bull/bear cycles as they occur within the overall marketplace. Integrating modern fundamental analytics within these technical cycles means maintaining a process of the thorough and ongoing analysis of many companies, sectors and industry groups. I believe this is a vital discipline in “investing wisely.”



Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.