eBay (EBAY) announced its earnings for the last quarter. The company earned 55 cents per share, which is slightly above the 54 cents per share expected by the analysts. In addition, the company was somewhat cautious for the holiday season as it expects to earn between 66 and 69 cents per share whereas analysts expect the company to earn 68 cents per share in the next quarter. Furthermore, the company expects to generate revenue between $3.85 billion and $4 billion in the next quarter, which may end up being below the analyst estimate of $3.94 billion.
It looks like eBay has been investing a significant amount of money and other resources to make its website easily usable through mobile platforms. The company has been redesigning its website, making it more smart phone-friendly, marketing itself more heavily, signing up partnerships with other retailers and working on improving the search capabilities within the website. The company has also been spending resources on making PayPal more flexible for the needs of consumers, which is important for eBay because PayPal accounts for nearly half of the revenues generated by the company.
Of course, every change comes with some risk factor and things might backfire in the short term for the company, but this is not very likely. I believe that the company's investments will pay off greatly in the future and its double-digit annual growth rate will be sustained for the time being. Many investors were expecting eBay to increase its outlook significantly as the company has gained a lot of momentum in the last several quarters. However, the company remains cautious given the slowing economy and increased competition from Amazon (AMZN).
The company has announced that in the last quarter, there were 800,000 consumers who bought did their first eBay shopping ever. If a good portion of these consumers continue to use the company's services, this is promising for the company's future. The company's CEO John Donahoe, whose leadership helped it see strong growth in recent years after lagging behind Amazon for several years, commented that he "didn't see why the company couldn't double its user base within the next 3-5 years." As the current users spend more and new users are added, growth should be solid for eBay in the medium and long term.
For the full year, eBay expects to earn between $2.32 and $2.35 per share on revenue of $14 billion. This is roughly in line with the analyst estimates. If they materialize, these numbers will give the company a forward price to earnings ratio of 20 and a forward price to revenue ratio of 4.4. These are valuations I would expect from a company that is expected to grow at a rate of 10-15% annually, and eBay actually meets this criterion. After being up by 58% year to date, eBay looks fairly valued. Of course, this doesn't mean eBay is a bad investment. A lot of companies that are fairly valued turn out to be great investments over time.
In the last 2 earnings reports, investors have reacted very positively. In April, the company's share price jumped from $35.87 to $40.62 after the earnings announcement. In July, the company's share price jumped from $38.60 to $44.85 within a matter of days once the company announced earnings. This time, I don't expect such a big jump. In fact, the company's share price might take a breather for a while and trade either flat or downwards. If the share price falls below $40 again, this company will become a great buy.
In the short term, the company's online marketplace business might continue to lose market share to fierce competition which includes but is not limited to Amazon, while PayPal fuels most of the company's growth. At the moment I wouldn't sell eBay but I wouldn't buy it either. I would simply wait for a better entry point that is closer to $40 for nice returns.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.