eBay: Buy It Below $40 And Ride It Higher

| About: eBay Inc. (EBAY)

by Larry Gellar

A new report suggests that eBay (EBAY) could be a hot stock to buy right now. ChannelAdvisor tracks revenue for companies that have used the service for a year or longer, and eBay's revenue statistic is up 22.4% year over year for the month of March. That's up from the 19.7% increase experienced in February, and fixed price sales were up 30.2% in March as well. The only negative part of ChannelAdvisor's report was the 20.7% decrease in auctions that eBay experienced, but this doesn't surprise me at all. Users are becoming increasingly frustrated with the uncertainty of bidding on items, but I believe that eBay has a number of other businesses that are strong enough to keep this stock moving higher.

Before we take a look at eBay's individual parts, let's compare it to its fiercest competitors. At a price-to-earnings ratio of 14.76, eBay is cheaper than other stocks like Amazon.com (AMZN), Google (GOOG), and Yahoo (YHOO). Those companies have price-to-earnings ratios of 140.07, 21.20, and 18.50, respectively. eBay also has reasonably strong price/earnings-to-growth and price-to-sales ratios -- 1.20 and 3.93, respectively. As for margins, eBay's gross margin (70.30%) beats out Amazon's (22.44%), Google's (65.21%) and Yahoo's (69.85%). eBay's gross margin of 20.37% is pretty good as well. Overall, I'm satisfied with eBay's statistics.

Raymond James recently released a research note on eBay, and I think investors would certainly be well-served to take a look at what the bank had to say. Raymond James lowered its rating from Strong Buy to Outperform, which is about where I would rank my enthusiasm. Based on comments from Raymond James, it appears the rating change was due to a new realization that PayPal's mobile revenue could take more time to develop than previously thought. Regardless, PayPal Here figures to be a lucrative enterprise, and Home Depot (HD) is one major retailer that's jumping on board. Additionally, the promotion of David Marcus to president is another positive piece of news for PayPal after the unit's previous president was hired as the new chief executive at Yahoo.

In fact, David Marcus appears to be the perfect candidate to take the lead on PayPal. Marcus sold his business, Zong, to eBay for $240 million, and the business was a crucial launching point for PayPal's current direction as a mobile payments processor. (Zong was a way for customers to attach their payments to their carrier bill, and PayPal still uses much of that startup's technology). Marcus joined eBay as vice president of mobile after selling his business, and I believe this makes him a top-notch candidate for PayPal overall. Clearly, PayPal's future growth will be largely in the mobile industry, and this is where a creative mind like Marcus' should help enormously.

Outside of the topics discussed in the Raymond James report, PayPal is also embarking on some exciting initiatives to streamline its business. The company just launched its PayPal Payments service, which will replace many of the smaller divisions that had some reference to the word "website" in its name. Here's how Peter Karpas, vice president of customer engagement for North America, explained the change: "We've talked about the blurring of online, offline and mobile, but we've talked about that in the large enterprise context. Now, we're extending that to heart of the company which is small business." This move should make it easier for businesses to work with PayPal, and PayPal is also offering a new "Advanced" option for its payments. Specifically, this should help businesses that want services of a level between the current Standard and Pro options.

Besides PayPal, eBay's other businesses also appear to be in pretty good shape. In fact, eBay Motors is one part of eBay that could see a special boost due to the tax season. According to a survey from Harris Interactive, many consumers are planning to use this year's tax return to purchase a vehicle or least some vehicle parts. eBay Motors has experienced increased search activity, and it certainly make senses that this trend would continue. With that in mind, I expect eBay Motors to play an important role in what should be a strong quarter for eBay, especially because of increased activity on eBay's mobile applications.

Another aspect of the eBay story that deserves attention is the company's strategy for India. eBay is projecting that the country's online shopping market will double in 2012, and the company hopes to take advantage of this by finding ways to get customers to purchase higher-margin items. As eBay knows too well, Indian consumers have historically purchased items with lower profit margins such as electronics and books. eBay would prefer that consumers buy items like shoes and clothes, although the Indian market is also characterized by other trends that eBay needs to overcome. The PaisaPay system is one payment method being offered to induce customers to make their purchases online, and Alibaba.com is a fierce competitor in the market for business-to-business exports. I expect eBay to make headway on these challenges, which in turn should cause the stock price to appreciate.

As always, I recommend investors check out a company's statement of cash flows, and eBay is no different. Although the company experienced a net outflow of cash of $886.31 million in 2011, much of that can be attributed to aggressive acquisitions and stock repurchases. As the economic recovery slowly but surely continues, this is a strategy I like, and investors should jump on board while the stock is still below $40. eBay's traditional Marketplace business is still holding steady, and PayPal could see significant growth due to the revolution in mobile payments. Additionally, I expect the promotion of David Marcus to be a significant tailwind going forward.

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

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