1 Extraordinary eCommerce Stock

The last time many investors may have stumbled across eBay (NASDAQ:EBAY) was when it was spinning off PayPal (NASDAQ:PYPL). That was back in 2014 after which PayPal stock went on a stunning ride from $34 per share to over $300 a couple of years ago.

It was nearly unfathomable to consider that in the subsequent two years it could collapse all the way back to $62 per share as it has, particularly given that PayPal was perceived as the golden goose that could scale globally whereas eBay was viewed as a mere marketplace for goods.

A quick glance at the share price confirmed how out of favor eBay was with investors. While PayPal had almost 10x’ed investor money, eBay had barely 3x’ed returns for loyal shareholders at the peak in 2021, and now the share price is up by less than $20 per share versus almost a decade ago, representing less than a double in valuation.

But the past is the past, does eBay now offer something compelling to buyers that few are even aware of?

The Bull Case for eBay

eBay is well-known in the US but it may surprise some to discover that a large portion of its user base comes from international users, creating a revenue mix that is attractive to institutional capital who prefer top line stability.

Revenue diversity also stems from the various divisions beyond the flagship marketplace. For example, eBay enjoys sales from advertising, payment processing, and classified listings too. 

And it’s getting better about optimizing ad serves through its artificial intelligence and personalized recommendation algorithms in addition to its heightened focus on fraud detection. When users are met with better, customized experiences, they tend to stick around longer, which ultimately boosts lifetime value.

By continually evolving its technology to meet market demands, eBay has a pricing data advantage that is the envy of many an upstart competitor. eBay enjoys a unique competitive advantage by tapping into historical pricing data for a wide array of products, including those where it enjoys a significant market share for unique items, collectibles and vintage goods. Its focus on smaller, more niche markets means eBay is less susceptible to disruption from other e-commerce players and can build a loyal customer base that is less price sensitive.

Further attributes that bulls can point to include eBay’s once innovative auction-pricing model that ensures it captures the full value of high-demand items. By employing such a dynamic strategy, eBay can report higher gross margins than would be possible if it chose a fixed-price approach, especially for rare and in-demand items.

Plus, eBay is renowned for building a cutting-edge seller ecosystem that is supported by tools and analytics that are critical to maintaining the marketplace’s active and diverse listing base.

In recent years, it also made a concerted effort to improve user experiences and indeed anybody who last tried the marketplace a couple of decades ago might be surprised to see just how easy, fast, and frictionless the whole buying process is. An important part of that seamless experience has been a keen focus on mobile commerce item selection and check out, which is also about as straightforward as one could imagine.

With all that said, does it translate to compelling fundamentals?

Is eBay Stock Undervalued?

eBay is 4.2% undervalued according to the consensus price target of 26 analysts who assess fair value at $45.26 per share.

A 5 year discounted cash flow forecast analysis puts a much more optimistic target price of $64.54 per share on eBay. And there’s good reason to believe that higher calculation may be the more accurate one. For instance, eBay currently trades at a price-to-earnings ratio of just 8.3x.

It seems the cat is out of the bag on the low valuation relative to the price given that the Board of Directors authorized a share repurchase scheme which amounted to $626 million in the most recent quarter.

Insiders have good reason to be optimistic about the firm’s prospects given that the gross profit margin last quarter sat at 71.8% which contributed to $1.66 billion in operating income.

Another factor that plays in favor of eBay bulls is the firm’s 2.30% dividend yield that is often overlooked. It appears highly sustainable, too, with a payout ratio of just 19.08%.

Profitability seems to be in no jeopardy either anytime in the near future given that the firm has an ROIC of 13.3%, well above the S&P 500 average.

Lastly, trading at just 2.2x the last twelve months sales suggests eBay is very much trading at reasonable, if not discounted levels currently.

Is eBay Stock a Buy?

If there was ever a time to consider a purchase of eBay shares, now might well be it. The company has fallen off so many investors’ radars yet continues to post impressive profits and margins. It’s clearly not exciting analysts based on their consensus view but the cash flows suggest there are good reasons to be more enthusiastic.

And having risen just 2.9% in 2023 through the end of December versus the S&P 500’s gain of 25% it’s been a significant laggard that perhaps deserves to catch up.

Add to that the fact that the dividend has been increased for 5 years in a row and net income is forecast to rise again in the coming year, and you’ve got a mix of positive variables that are hard to ignore.

Whether it’s the low PE ratio and PS ratio, the cash-rich balance sheet, or steady flow of operating income figures quarter after quarter in the black, there is a lot to like about eBay, if not as a growth stock as it once was in its heyday, perhaps simply as a value stock that produces enormous levels of cash flow. Indeed last quarter levered free cash flow was reported at $777 million, quite a feat for a company that isn’t featuring on investors’ radars as it once did.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.