Shares of eBay (EBAY) rose almost 8% over the past trading week. The operator of the same name online market place, and the owner of the fast growing online payment service PayPal benefited from strong Black Friday and Cyber Monday sales.
Strong Online Sales Season
Online sales on Cyber Monday rose 24.1% according to IBM which tracks transaction data from 500 US retail websites. This compares to growth of 15% last year. IBM notes that online sales growth mostly represents additional online sales, rather than cannibalization of sales during the rest of the season.
Market researcher ComScore estimates that online sale on Monday came in at $1.5 billion. ChannelAdvisor estimates that sales by third party merchants on eBay in specific, rose by 57% on Cyber Monday. This growth was roughly 5 times the growth rate of 2011. eBay's numbers are incredible, driven by a strong marketing campaign and consumer's desire to do more shopping online.
PayPal
Rather than just purchasing more gifts on eBay's website, consumers are also using eBay's PayPal unit to pay for their purchases. Total payment volume rose by 44% on Cyber Monday, driven by a 190% increase in mobile payment volumes.
Rather than just making PayPal more available in the online world, eBay also made PayPal available in over 17,000 stores including Home Depot (HD) and Abercrombie & Fitch (ANF). A deal with Discover Financial Services (DFS) will make PayPal available in many other physical store locations.
Division director Marcus points out that PayPal's success ultimately does not depend on a focus on payments. Rather, PayPal is focused about "providing an entire shopping experience and ensuring people get relevant offers for what hey are buying". To do this, PayPal is focusing on data it receives from the transactions of its 117 million active users.
Valuation
eBay ended its third quarter with $9.1 billion in cash and equivalents. The company operates with $4.5 billion in short and long term debt, for a net cash position of $4.6 billion.
eBay is on track to report annual revenues of roughly $14 billion. Full year earnings could come in around $2.6 billion, with GAAP earnings per share coming in at $1.95-$1.99 per share.
The market currently values eBay at $68.3 billion, which values operating assets at $63.7 billion. This values operating assets at roughly 4.5 times annual revenues and 24-25 times annual earnings.
Despite the significant financial strength and flexibility, eBay does not pay a dividend.
Some Historical Perspective
Year to date, eBay's shares have risen an astonishing 72%. Shares are currently exchanging hands at all time highs of $53 per share. The 8% gains over the past week come on the back of a strong recent performance after the third quarter earnings in October.
Revenues rose some 65% between 2008 and 2012, as eBay is expected to report annual revenues of $14 billion this year. Growth is driven by both the marketplace business, as well as the PayPal payment division. The payment unit grew 23% in the third quarter, making up 43% of total revenues. Marketplace revenue growth came in at 9%, and payment revenues could reach 50% of total revenues in the coming quarters.
Investment Thesis
In hindsight the $1.5 billion acquisition of PayPal a decade ago has been a crucial move for eBay. The payment division is driving growth at the company and integrating all the data between the payment and merchandise division could spur future growth. It might very well be that eBay could be transformed into a technological payment company altogether in the coming years, as the traditional eBay website diminishes in relative importance.
I am really optimistic about the prospects of eBay as a company, but the stock has moved too far, and too fast for me this year. Valuation multiples have increased to 24-25 times 2012s expected earnings, driven by accelerating profit growth. Shares definitely do not provide a compelling short opportunity, given that eBay could simply "grow" into its valuation in the coming years.
I reiterate my stance and remain on the sidelines.
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.
