eBay: Time To Buy?

| About: eBay Inc. (EBAY)
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In today's rapidly changing business and technology world, a company can redefine itself and take a different identity if you don't pay much attention to it for a while.

Take the case of eBay (NASDAQ:EBAY). Yes, it still runs an online auction service where people can buy and sell old baseball cards, used cars and assorted oddities. But as Fortune magazine referred to eBay in an article in its February 25, edition, the company is now "... a full-service e-commerce operation that helps big retailers such as Home Depot... and hundreds of others navigate the complex world of mobile payments, online comparison shopping and same-day delivery."

The company takes its new identity a step further by no longer thinking of itself as just an e-commerce enterprise, but as a global commerce leader, without the e-.

Among its assets is PayPal, which enables users to send and receive digital payments; and GSI, which facilitates e-commerce, multichannel retailing and digital marketing for global enterprises. The company also reaches millions through specialized marketplaces such as StubHub, the world's largest ticket marketplace, and eBay classifieds.

Aggressive Growth Strategy

eBay recently outlined a three-year aggressive growth strategy based on its belief that mobile technology is leading a "commerce revolution" that will create significantly different consumer and retail experiences worldwide. What differentiates its plan from the plans of some other companies is that eBay has a reputation for execution. The details of its plan include:

  • Growing revenues from $14 billion in 2012, to $21.5 billion in 2015, increasing earnings per share by 15 to 19 percent during the same period, and generating free cash flow in excess of $11 billion.
  • Its Marketplaces unit is expected to achieve revenues of $10.5 billion to $11.5 billion in 2015, representing a 14% compound annual growth rate at the midpoint.
  • PayPal is expected to achieve revenue growth of $9.5 billion to $10.5 billion in 2015, representing a 22% compound annual growth rate at the midpoint.
  • GSI Commerce is expected to achieve revenue growth of $1.5 billion to $1.7 billion in 2015, representing a 14% compound annual growth rate at the midpoint.

While eBay's management instills confidence that it can reach these aggressive targets, it is by no means a foregone conclusion. First, there is the unknown about how an Internet sales tax provision being proposed in Washington, and which eBay is combating, would impact its business. Second, there is no guarantee that the economy will grow enough to make these plans occur. Finally, eBay will meet strong resistance from equally well-managed companies like Amazon and Google.

Robust Shareholder Returns

At the present time, eBay has been rewarding investors for the past year, climbing from $38 to a recent 52-week high of $58. Since its earnings announcement on April 17, in which its guidance for upcoming quarters somewhat disappointed analysts and investors, shares have fallen to about $52. The stock is selling at a price-to-earnings ratio of 25.7.

In that earnings release, the company is forecasting second-quarter revenue of $3.8 billion to $3.9 billion. While that would constitute a 13.3% increase from the second quarter of 2012, consensus analyst expectations were for quarterly revenue to hit $3.95 billion. More importantly, its expectation of generating earnings per share of $0.46 to $0.48 on a non-GAAP basis was well short of the $0.57 estimate by analysts.

Solid First-Quarter Numbers

For the first quarter of 2013, eBay's revenue increased 14% to $3.7 billion, compared with the same period of 2012. The company reported first-quarter net income on a GAAP basis of $677 million, or $0.51 per diluted share, and non-GAAP net income of $829 million, or $0.63 per diluted share. The year-over-year increase in first-quarter GAAP and non-GAAP earnings per diluted share was driven primarily by strong top-line growth.

Downloads of eBay's suite of mobile apps expanded the company's overall commerce footprint, surpassing 162 million since launch in the third quarter of 2008. eBay gained approximately 2.8 million new customers in the period through mobile, driving double-digit growth in active users at both PayPal and Marketplaces.

The company's PayPal business delivered strong first-quarter performance with revenue increasing 18% to $1.5 billion. PayPal gained 5 million active registered accounts in the period and ended the quarter with 128 million, a 16% increase.

The company's Marketplaces business also delivered strong first-quarter performance with revenue increasing 13% to $2.0 billion. Marketplaces gained 3.9 million active users in the period and ended the quarter with 116 million, a 13% increase.

GAAP operating margin increased to 21.3% for the first quarter of 2013, compared with 19.9% for the same period last year, and eBay generated $937 million of operating cash flow and $638 million of free cash flow during the first quarter of 2013.

eBay's asset base almost doubled from 2011 to 2012, from $12.66 billion to $21.4 billion, which included an increase in cash and equivalents from $4.69 billion to $6.82 billion. At the same time, the company has recently taken on a larger amount of debt, from $1.53 billion in 2011, to $4.11 billion at the end of last year.

It's little wonder that of the company's 38 analysts listed on Reuters, only eight rate the stock as a hold, while 16 have it listed as a strong buy and the remaining 14 rate it a buy.

eBay's business continues to show all signs of improvement. It would seem that eBay has taken all the necessary measures to grow. It has augmented its auction business with a regular online store similar to Amazon. It is attracting big name buyers and sellers. It has improved its technology, navigation and fulfillment services in the process.

And you can still find a watercolor portrait of a frog in bamboo for $50.

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

Business relationship disclosure: This article was written by an analyst at Catalyst Investments.

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