Where is eBay Headed?

eBay (EBAY) reported earnings and revenues for Q3 that beat Street estimates (see conference call transcript), but took a huge one time charge related to its costly purchase of Skype, a voice-over IP provider. But there are some other bright spots in eBay's report.

CEO Meg Whitman says:

The PayPal business continues to deliver incredibly well across the globe, marked by increase in total payment volume up 34% to $12.2 billion and the Revenue grew to $470 million, and we couldn't be more pleased by the trajectory of this business.

eBay continued share repurchase program in the quarter, buying back $500 million of eBay shares in Q3, and $2.8 billion since the launch of the initial repurchase program in July of last year.

eBay continues to perform well around the world, particularly in the UK, France and Australia. Besides this, the adoption of PayPal continues to steadily increase all over the globe. Recent consumer research found that PayPal was the second most popular way to pay online in the U.S, right behind Visa. In the UK, PayPal was tied with Visa as the most popular way to pay online.

Company Profile

eBay, Inc., through its subsidiaries, provides online marketplaces for the sale of goods and services, online payments services, and online communication offerings to a diverse community of individuals and businesses in the United States and internationally. It operates in three segments: Marketplaces, Payments, and Communications.

The company was founded in 1995 and is headquartered in San Jose, California.

Fundamental Analysis

The following reports are as of September 30th 2007 results.

Financial Health

• Current Ratio = Current Assets/Current Liabilities = 1.94
• Total Liabilities/EBITDA Ratio = 1.62
• Total Liabilities/Operating Cashflow = 0.66

Very good financial stability. Their Total Liability is very small, as evident from the following ratio:

• Total Liability/Share-holder equity = 0.36
• Total Liability/Total Assets = 0.26

Profitability

• TTM Sales growth: 20.8%
• Last year Sales growth: 31.13%
• Latest quarter over year ago Quarter sales growth: 30.4%
• TTM Operating Margin improvement: -74.58%
• TTM Operating Margin improvement: 6.6% (without Skype write down charge)
• TTM Return on Asset: 1.11%
• Last 2 year Gross Margin: 80.5%
• TTM Gross Margin: 77.6%
• Last 2 years Net Margin: 21.3%
• TTM Net Margin: 2.3%

Sales has been clearly slowing down in the past twelve months and maybe a good indication of slowing consumer spending too. The negative Operating Margin is coming from the one time $1.4 billion dollar charge that eBay took due to a Skype related write down. Excluding the 1.392 billion dollar charge, the operating margin would be 23.98% and Operating margin improvement is 6.6%. All is still not too bad for eBay.

Analysts Rating

eBay still seems to be in favor among analysts.

• Strong Buys: 10
• Buys: 3
• Hold: 5
• Sell: 0

Competition

eBay has held up pretty well in the past 12 months in terms of gross & operating margins when compared to its competitor Amazon (AMZN). But eBay's web traffic has been declining and eBay is struggling for sales growth. More of eBay's comparison with Amazon is discussed in this blog post from Sramana Mitra.

Weakness/Threats

Revenue growth is the current challenge that eBay is faced with. Revenues can slowdown due to slowing consumer expenditure. Unless eBay does not experiment with another expensive move like its Skype purchase, eBay should benefit when consumer confidence improves on the economy.

Technical Analysis

My Bottomline

If eBay can further grow its global revenues and if Paypal continues to do well, then eBay can do pretty good in the year to come. Another mishap like Skype can prove deadly though. But the much expected consumer-led slowdown in the US can affect eBay's stock price. So I am putting eBay in my watchlist and not jumping for it now.