eBay: Lack Of Triggers After A 60% Return Despite Ongoing PayPal Strength

| About: eBay Inc. (EBAY)

Shares of eBay (NASDAQ:EBAY) trade largely unchanged on Wednesday in after-hours trading. The internet marketplace and online payment solution provider reported its third quarter results after the close.

Third Quarter Results

eBay reported third quarter revenues of $3.40 billion, up 15% on the year. Revenues were roughly in line with analysts expectations of $3.41 billion.

The company boosted its net profits by 22% to $597 million. Earnings per diluted share rose 21% to $0.45. Non-GAAP earnings per share rose 14% to $0.55, beating analysts consensus by a penny.

The company's PayPal unit was the driver behind growth, making up 43% of total revenues. The unit registered 14% more users to 117.4 million. Despite the growth at the payment unit, President Marcus will consolidate product groups and reorganize the business, leading to modest job losses among the 13,000 employed at PayPal.

CEO John Donahoe commented on the results,

We had a great third quarter across our company with Marketplaces and PayPal accelerating customer growth. Mobile continues to be a game changer for us, and we continue to be a clear leader in mobile commerce and payments. With our strong portfolio and global reach, we are consistently demonstrating our capabilities to help consumers shop anytime, anywhere.

Segmental Information


The payment division, "PayPal", performed very strong during the quarter. Net revenues rose 23% to $1.37 billion, on the back of a 20% growth in net total payment volumes to $35.2 billion. Growth in merchant services came in at 23% to $23.7 billion, while eBay volumes rose 15% to $11.5 billion.


Revenues for the marketplace division rose 9% to $1.81 billion. Gross merchandise volumes rose 11% to $16.3 billion. US gross merchandise volumes rose 16% to $6.5 billion, while international gross merchandise volumes were up 8% to $9.8 billion.


For the fourth quarter of 2012, eBay expects revenues to come in between $3.85-$4.0 billion. Non-GAAP diluted earnings per share are expected to come in between $0.66-$0.69 per share. GAAP earnings are anticipated to come in between $0.55-$0.58 per share.

On average, analysts expected eBay to guide for fourth quarter revenues of $3.94 billion, on which they expect eBay to earn $0.68 per share, on a non-GAAP basis.

For the full year of 2012, revenues are expected to come in between $13.95-$14.10 billion. Non-GAAP diluted earnings per share are expected to come in between $2.32-$2.35 per share. GAAP earnings are anticipated to come in between $1.95-$1.99 per share.

The full year non-GAAP earnings outlook is in line with analysts expectations of $2.34 per share.


eBay ended its third quarter with $9.1 billion in cash, equivalents and short term investments. The company operates with $4.5 billion in short and long term debt, for a net cash position of roughly $4.6 billion.

For the first nine months of 2012, eBay generated revenues of $10.1 billion. Net income came in at $1.86 billion, or $1.42 per diluted share.

The market currently value eBay at $62 billion. Excluding the net cash position, the market values the operating assets at roughly $57.5 billion. This values the firm at 4.1 times annual revenues and 22-23 times annual earnings.

Currently, eBay does not pay a dividend.

Investment Thesis

Year to date, shares of eBay have risen almost 60%. Shares started the year at $30 and steadily rose to highs of $50 in recent weeks, on the back of a strong full year outlook. Shares are changing hands at $48 at the moment.

Over the past five years, shares have returned some 20%. Shares traded as low as $10 in the beginning of 2009 and steadily rose to levels around $50 in September of 2012. The company has aggressively boosted its annual revenues from $8.5 billion in 2008 to an expected $14.0 billion in 2012. Net income rose from $1.8 billion to $2.6 billion, in the meantime.

Shares of eBay had a great run so far this year. The company's PayPal division has driven results and growth. Yet investors are slightly disappointed by the third quarter report, which was in line with expectations. Most likely expectations for an earnings beat have risen too high in recent weeks, as shares continued to make new highs.

Back in April, I took a look at eBay after the company published strong first quarter results. I applauded the company for the $1.5 billion acquisition of PayPal and thought shares were trading at fair valuation levels around $40 per share. Shares have risen another 20% since that point in time, boosting the valuation to 22-23 times earnings. While the company's balance sheet is rock solid, the company has not engaged in share repurchases, or paid out dividends to shareholders.

Given the cautious outlook and the rich valuation, I see few short term triggers for the stock. Unless the company will use some of its large cash balances to please investors, I see few reasons to hold on the shares at the moment after a 60% run in 2012.

Disclosure: I 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.