eBay Is Still A Strong Buy At $33 Per Share

Feb.14.12 | About: eBay Inc. (EBAY)

Ebay (NASDAQ:EBAY) has had quite a good run-up in recent months, rising from $28 per share in November 2011, to $33 these days. In this article, I provide arguments why Ebay is still a strong buy at $33 even after this recent rally.

"eBay Inc. provides online platforms, services, and tools to help individuals and merchants in online and mobile commerce and payments in the United States and internationally[...] Its Marketplaces segment operates e-commerce platform eBay.com; vertical shopping sites, such as StubHub[...]The company's Payments segment offers payment and settlement services for consumers and merchants on and off eBay Websites and other merchant Websites. This segment operates PayPal." Source: Yahoo Finance

Ebay is a fast growing company
Ebay is still a fast growing company as the track record from 2006 to 2011 shows:

  • Sales per shares more than doubled from $4.26 per share to $9.01 per share in 2001.
  • Earnings per share in the same period tripled, from $0.8 per share to $2.5 per share in 2011.
  • Revenue increased 28% YoY from 2010 to 2011.
  • 54% of revenue comes from the marketplaces business unit
  • 40% of revenue comes from the payment solution business unit
  • 5% of revenue comes from the marketing servies business unit

Ebay has room to grow
While the growth of the traditional auctions slowed down recently to 8% per annum, Ebay has room to grow in fixed priced sales and most of all in its payment solutions business unit (Paypal). PayPal is growing in 3 main directions:

  • Usage growth and geographic growth for the core internet merchant solution: 30% YoY transaction growth
  • Growth in mobile payments: 500% YoY growth in mobile payments
  • Growth with offline retailers using Paypal for in-store transactions [first pilot with Home Depot (NYSE:HD)]

For more details, read Ebay's last earning call transcript.

Ebay is profitable and shareholder friendly
Ebay is very profitable with an impressive average Return on Tangible Capital Employed (ROTCE) of 36% for the last 5 years.
Further more, Ebay's management allocates the retained earnings wisely. Earnings re-invested in the business generated subsequent earnings growth with a 28% return.

Ebay is undervalued and is buying back shares
A quick DCF analysis values Ebay at $40 per share with a growth of 10% per annum, and values Ebay at $48 per share assuming an average growth of 15% per year. (Reminder: Ebay's 5-year historic growth rate is 20%). Ebay is much less expensive than Amazon (NASDAQ:AMZN), which has a current PER of....139(!).
Management announced that it will pursue its shares repurchase program.

Risk
As usual, there is no free lunch is this world and there are some risks/downsides in investing in Ebay:

  • The company does not serve dividends
  • Amazon is a strong competitor both for the market place and payment solutions (Checkout).
  • Other competitors in the traditional retail group such as Walmart (NYSE:WMT), Best Buy (NYSE:BBY), American Express (NYSE:AXP) or even Google (NASDAQ:GOOG) might offer alternatives for the market place of payment solutions.

Disclosure: I am long EBAY.