eBay Undervalued Against Overly Hyped Dot-Com Stocks

Includes: AMZN, EBAY, FB
by: Takeover Analyst

When it comes to overvalued, I believe that Amazon (NASDAQ:AMZN) tops it all - even Facebook (NASDAQ:FB). The stock recently hit its all time high of around $260, which prices the stock at a respective 316x and 109x past and forward earnings. This is despite low single-digit ROA, ROE, and ROI. Debt-to-equity may be at 0, but growth comes nowhere close to justifying the current valuation.

In fact, if you assume that the company grows EPS by an average of 50% over the next 5 years, 2016 EPS should come out to $8.03. At a very generous 20x multiple, the future value of the stock by 2016 should be $160.60. And this calculation is actually pretty generous considering that it starts 2013 out at $2.38, despite the fact that EPS over the trailing twelve months was $0.82.

Well, the stock is currently worth $259.14. Again, 50% EPS growth over the next 3 years starting generously at $2.38 in 2013 would make the stock worth $160.60 at a 20x multiple. What should that be worth in 2012 dollars? To get that number, we would need to discount backwards by 10%, which yields just less than $100. That means that the stock is 277% overvalued under generous multiples!

There is, however, promise for Facebook. With around 800 million active users, the company controls a virtual economy. This unparalleled economic moat grants the social networking giant a large "network" to monetize through third-party ads, social media games, and advertising agencies, among others.

Now, what kind of growth rate is reasonable for Amazon? Analysts forecast 31.7% annually over the next 5 years. I believe this is actually too optimistic, since the business is maturing. While EPS may have grown by 25% annually over the past 5 years, it is too risky to project acceleration given the few barriers to entry and intense competition. Thus, I will apply a 12% discount rate to the 31.7% annual EPS forecast and 15x multiple, which pegs the present value at $46.22. Amazon is a drastically overvalued stock, and the fact that it continues to linger this high is a testament to how markets can be inefficient at times and operate under inconsistent rules.

The inconsistency can be seen when you compare Amazon to eBay (NASDAQ:EBAY). Like Amazon, eBay has a hallmark brand name in eCommerce. And like Amazon's Kindle, it has another line that is catching on like "fire" (pun intended): PayPal. Growth in this segment has been substantial in boosting free cash flow.

Despite strong momentum, eBay trades well below its historical PE multiple at 17.3x past earnings. Analysts forecast 13.1% annual EPS growth over the next 5 years, and this puts the present value of the stock at $41.48 when you apply a 10% discount rate and a 17x multiple. The stock is currently worth $49.24, so it is overvalued… but compared to peer Amazon, risk/reward is actually very compelling. If eBay continues to grow like it has and PayPal becomes recognized by the market through smartphone compatibility in stores, there is a chance for multiples to catch up to the sky-high levels of Amazon. Also, eBay does not have to go searching the Amazon to find the secret sauce - all it needs to do is convey its PayPal catalyst to the market, and multiple expansion will likely follow. In my view, this warrants a small speculative "buy."

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.