eBay: The Sleeping Giant No One Talks About

| About: eBay Inc. (EBAY)


eBay does not appear in the media regularly.

The company has a proven track record of making acquisitions.

There is more room for growth especially internationally.

No one talks about eBay (EBAY) anymore. This year, only 25 article entries have been made in TechCrunch with the word eBay. Amazon (AMZN) has been mentioned more than 300 times. In Seeking Alpha, only 6 articles on eBay have been submitted this year compared to almost a hundred on Amazon. eBay’s stock is currently trading at an all-time high of $34. In this article, I will give the reasons why you can expect eBay to grow in the future.

eBay operates one of the most popular e-commerce platforms in the world with more than 167 million customers. In the past three months, its website and mobile app have been visited more than 3.3 billion times according to analytics firm Similar Web. eBay is the 25th most popular website in the world and the 6th in the United States.

eBay has also diversified its revenue sources with most of its revenues coming from the international market.

Screen Clipping

Source: 10-K

In the past 20 years, eBay has managed to grow to become one of the leading tech firms in the world. This growth is partly attributed to the company’s past acquisitions. In 2002, eBay acquired PayPal (PYPL) for $1.2 billion and spun it off in 2015 giving it a valuation of almost $50 billion in its first day of trading.

In 2001, the company invested a tiny sum of money in Mercadolibre (MELI) and sold its stake in 2016 for $1 billion. In 2007, eBay acquired StubHub for $307 million. In 2016, StubHub generated almost a billion dollars for eBay. Yesterday, it was reported that eBay invested $500 million in Indian e-commerce company, Flipkart. You can view eBay’s other acquisitions here.

eBay is a highly profitable company with high margins compared to other e-commerce companies. In 2016, the company sold merchandise worth $84 billion giving it more than $9 billion in revenues. Its net income was $7.3 billion and its operating margin was 25%. In comparison, Amazon, Bed, Bath & Beyond (BBBY), and Ulta Beauty (ULTA) have operating margins of 3.08%, 4.71%, and 13.49% respectively. In 2017, the company forecasts revenues of between $9.3 billion and $9.5 billion and operating margins of between 29% and 31%.

eBay is a slightly undervalued company. Its P/E ratio using its projected one-year earnings is 15.38. This is lower than that of its peer companies like Amazon, Ulta, and Alibaba (BABA), which have P/E ratios of 71.36, 29.3, and 20.5 respectively. The reason for this I believe is the fact that eBay has not ventured out of its e-commerce universe. Amazon has diversified its portfolio to include devices (Amazon Echo), cloud (Amazon Web Services), and Music among others. Alibaba on the other hand has invested in cloud (Alibaba Cloud), payments (Alipay), film, and social media (Sina Weibo).

Concerns about eBay’s growth are valid considering that it makes its money from its marketplace and ticketing services. It does not have significant revenue outside of the two. This is compounded by the fact that the company is not hot anymore. As mentioned in the introduction, very few people talk about eBay these days. A recent report by Piper Jaffrey (PJC) showed that only 2% of teens shopped at eBay compared to 40% at Amazon. There are also concerns about increased competition from the likes of Wal-Mart (WMT) and Amazon, which have more resources than eBay.

However, I believe eBay can overcome these challenges. First, eBay has more room to grow in the international market. In the past, eBay has made several strategic investments internationally. Investments like MELI have returned huge returns in the company. They have also contributed to eBay’s growth in the international market. As mentioned, 59% of eBay’s revenues come from the international market.

In 2016, revenues in the U.S. grew by 3% compared to 7% in the international markets. Learning from its past failings in China, eBay has returned to the country by partnering with Ningbo. Adam Minter of Bloomberg notes that the new arrangement will help eBay compete with the likes of Wish, the popular e-commerce app. As global commerce continues to grow, eBay will benefit with its presence in the manufacturing hub of China.

Second, I believe that eBay can win the hearts of the younger demographic again. In online shopping, young people want four things: price, security, variety, and shipping. They want the low-priced products shipped faster. eBay is in the process of fixing this. eBay has introduced Guaranteed Delivery, a service that simplifies the shipping process.

This is a good start although it still does not match Amazon Prime, which bundles so many products together. Young people also want to shop using their mobile devices. Their impression of the mobile apps determines whether they will continue buying or not. Last year, eBay updated its apps across its devices leading to significant improvements in user reviews.

Third, this year, eBay plans to increase its ad spending to reach out to the young people. In 2016, the company spent $2.3 billion in sales and marketing. This was a 4% increase from the previous year. This figure represented 23% of the company’s total net revenues. At this point, this is in the best interest of the company as it reaches out to the millennials. The percentage of marketing to net revenues is also slightly lower than that of other e-commerce companies.

Finally, in 2016, eBay generated $2.2 billion in free cash flow. It returned $3 billion to investors through share repurchases. Also, the company has more than $7.5 billion in cash and short-term investments against total long-term debt of $7.5 billion. This means the company can continue making investments in strategic companies while continuing to return cash to investors through repurchases.

In conclusion, as global e-commerce spending increases, eBay will benefit from these trends. Although a lot of emphasis has been put on Amazon, I believe eBay is another company that investors and the media should focus on. As demonstrated above, eBay has a number of avenues to achieve growth in the future. It is also impressive that the company continues to return excess cash to shareholders.

Disclosure: I am/we are long EBAY.

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.

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