eBay - PayPal Drives Shares Higher

Apr.19.12 | About: eBay Inc. (EBAY)

Shares in eBay (EBAY) rose some 7% in after hours trading after the internet merchant and owner of PayPal raised its full year outlook.

First Quarter Results

The operator of the world's largest internet marketplace saw a 20% increase in net income to $570 million, or $0.44 per share compared to $0.36 last year. Adjusted earnings per share came in at $0.55, beating analyst consensus who expected the company to report earnings of $0.52. Revenues increased 29% to $3.28 billion exceeding Wall Street's consensus of $3.15 billion.

eBay has expanded its PayPal services at many brick and mortar retailers including Home Depot. Revenues at PayPal increased 32% to $1.31 billion as the number of active accounts increased 12% to 109.8 million. Total payment volume increased 24% to $34 billion.

Revenues at the marketplace division increased 11% to $1.73 billion as gross merchandise volume on eBay rose 12% to $16 billion. 78 million people have downloaded the eBay app, and the company expects to have $8 billion in mobile transaction for the entire year of 2012.

""We believe that innovation in retail today is technology driven, and consumers are embracing smarter, easier, better ways to shop," according to CEO Donahoe.

Outlook

For the second quarter of 2012 the company expects adjusted earnings per share of $0.53-$0.55 on revenues between $3.25-$3.35 billion. For the entire year of 2012 eBay expects net revenues between $13.8 and $14.1 billion, with diluted earnings per share coming in at $1.91-$1.96

Valuation

eBay ended the first quarter with $5.8 billion in cash and equivalents. The company operates with roughly $2.1 billion in short and long term debt for a net cash position of roughly $3.7 billion. Factoring in a 7% increase in after hours trading, the market values the operating assets of the company around $46 billion. This values the company at 3.9 times annual revenues and merely 14 times 2011's earnings which were boosted by one time items.

eBay trades at a significant revenue premium compared to internet competitor Amazon (AMZN) which trades at 1.8 times annual revenues. Margins of Amazon are however much lower and the company trades well over 100 times annual earnings. The premium revenue multiple is largely the result of the premium PayPal business of eBay which grows quickly, has higher margins and requires little capital to operate.

Investment Thesis

Shares in eBay have seen a strong recovery from lows of $12 in the beginning of 2009 to current levels approaching $40 per share in after hours trading. This is still 30% below the all time high set in 2004 when shares peaked around $58 per share.

In hindsight the $1.5 billion acquisition of PayPal a decade ago has been a stellar deal. eBay's growth is driven by the PayPal unit as revenue growth in the traditional market place is slowing down. At this pace the company is no longer simply providing complementary services (being able to pay your purchases on eBay with PayPal) but it is actually gradually transforming into a global online payment company which is focused on consumers and small businesses.

Valued around 18-19 times expected 2012's earnings, shares trade at a fair valuation.

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