eBay Is a Winning Bid - Barron's

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Includes: AMZN, EBAY
by: Rachael Granby

eBay (NASDAQ:EBAY) is evolving and becoming more profitable, and its PayPal and Skype units make the company look even better. Barron's Michael Santoli says investors should bet on eBay's continued growth.

eBay could be worth 30% more than its recent $21.25 as the company's turnaround efforts in its online-auction business begin to show results (including a 2.7% increase in items sold vs. a 1.6% decrease in the previous quarter). The company has a generous cash flow and it looks like a bargain compared to pricier e-commerce stocks like Amazon (NASDAQ:AMZN). The company's margins are good too; last year it earned $1.8B on $8.5B of revenue, as compared to Amazon's $645M on $19.2B of sales. eBay plans to build its revenue to $10-12B by 2011, along with mid-single-digit percentage gains in earnings, and an aggregate $6-7B of free cash flow.

Its PayPal and Skype units are growing quickly and hold much potential. Last year, PayPal accounted for 28% of revenue and 16% of income. PayPal is used in 64.4% of eBay transactions, up from 56.5% over the past year. Skype contributed less than 10% of revenue but is growing by more than 420% a year and has 481M registered users. Even if eBay spins off Skype, as planned, the move could highlight Skype's value and simplify eBay's business.

Non-U.S. revenue continues to grow, contributing 54% of Q2 sales.

eBay is focusing on accommodating large sellers of merchandise, increasing the proportion of fixed-price merchandise as compared to auctioned products. Though eBay will face competition from Amazon and other e-commerce sites, this is an important transition, since the growth rate of the auction business has been falling since Q4 2008.

Santoli writes that "eBay has gone from overhyped and overvalued to underloved and underpriced," and investors don't fully appreciate the "global, multifaceted and increasingly profitable company" eBay has become. The stock could see a pullback to $20, but this could be a good buying opportunity for a careful investor as eBay could climb back to the high 20s in the next year or so.

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  • eBay recently announced a series of changes to its core marketplaces, including an updated search algorithm favoring new products and a limit on communication between buyers and sellers, as part of its effort to accommodate larger sellers.
  • eBay: Q2 EPS of $0.37 beats by $0.01. Revenue of $2.1B (-4%) vs. $2B. Sees Q3 EPS of $0.34-0.36 vs. $0.35. Sees Q3 revenue of $2.05B-2.15B vs. $2B. Marketplaces revenue in Q2 $1.26B, down 14% Y/Y. Skype revenue $170M, up 25% Y/Y. (PR)