eBay: What Was Really Impressive

| About: eBay Inc. (EBAY)

Summary

One year ago I initiated coverage on eBay.

The stock has mostly traded flat since that time.

Earnings are out and I discuss the results and where the stock may be heading.

One year ago I initiated coverage on a little company that I used to do a bit of business with called eBay Inc. (NASDAQ:EBAY). I told you that I used the site to sell a ton of old sports cards and memorabilia, as well as some random items including printer cartridges, video games, unopened posters and more. As we know however, PayPal, its once subsidiary has now been separated into its own stand alone company. As a stock, to me, it's never been reliable as an investment, however, you can always cherry pick a time frame to argue against this assessment. That said, is it changing now? Well the stock looks poised to hit new 52 week high after reporting earnings. Still, the stock has mostly traded sideways since I opened coverage, reiterating my thesis that the name is a strong one to trade, but not the best investment at the time. Despite this reality, the company is doing quite well. But forget the past, where is this stock going next.

I'll be honest. I think the stock can move higher and surpass the $30 mark based on the momentum it is seeing and the results it just delivered. The just reported quarter was decent, but not incredible by any means. eBay's second quarter revenue increased 5.7% year-over-year to $2.23 billion, and this beat analyst estimates by $110 million. GAAP earnings came in at $437 million or $0.38 per share up 7% over last year. A better measure is the adjusted earnings. Adjusted earnings rolled in at $496 million, or $0.43 per share. This is up nicely year-over-year and was a $0.01 bottom line beat. All in all, it was a solid quarter. But we need to dig a little deeper.

For the first time the company surpassed the one billion live listings mark. That is incredibly impressive. eBay's gross merchandise volume saw growth on an constant dollar basis. If we exclude the negative impact of currency related issues which are plaguing all domestic companies, the gross merchandise volume increased 4% year-over-year. Of course absolute year-over-year comparisons are complicated because foreign currency movements continued to have a negative effect, impacting the revenue growth rate of the eBay Marketplaces and of course StubHub.

What was really impressive was the operating margin improvement. Operating margin improved to 23.8%, compared to 20.3% last year on a GAAP basis, while taxes were also lower, coming in at 18.2% versus 19.5%. Cash flow was higher, coming in at $764 million of operating cash flow and $617 million in free cash flow. What is important to also point out, and this is good for long-term investors, the company bought back $500 million in stock or 20.8 million shares in the quarter. David Wenig, President and CEO of eBay said:

"Q2 was another good quarter where we delivered strong results and had acceleration in growth. We are now one year into executing our strategy to provide the best choice, the most relevance and the most powerful selling platform, and there are signs of momentum in our business. We continue to invest in our platforms to ensure eBay is a global commerce leader for years to come."

Looking ahead, the company is growing steadily, though the stock is a touch pricey here, based current share price on current and future earnings in my opinion. That said, the company raised its guidance. 2016 earnings are projected to be about $1.85-$1.90 on a GAAP basis. That said, I don't think it is necessarily grossly overvalued, but I still can't recommend a buy here. I would wait for a pullback. The good news is that as a whole, the stock is definitely looking more reliable over the last year as an investment, and not a trading stock. Still, despite all of the positives, you need to time your buys in this name. There is momentum here, but I would not be a buyer at a 52 week high, even with the new $2.5 billion stock repurchase program.

Note from the author: Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit "follow." He also writes a lot of "breaking" articles, which are time sensitive, actionable investing ideas. If you would like to be among the first to be updated, be sure to check the box for "Real-time alerts on this author" under "Follow."

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.