- Valuations of eBay are better than most blue chips in the eCommerce industry which is why investors are focusing on it.
- In the present situation, eBay’s core business is generating most of the revenues while Paypal accredits around 40 percent.
- Paypal is going to become eBay’s biggest source of revenue in the coming years.
The debate about the future of e-commerce has been raging on for some time. There are those who argue that e-commerce will make traditional brick and mortar businesses redundant (or at least make them a lot less relevant) while there are those who argue that e-commerce is a bubble not very different from the dot come bubble. However, this much is certain that e-commerce is what investors would call a hot sector. Investors from different schools of thought look at a “hot sector” differently. Growth and momentum investors focus on hot sectors looking for stocks which have remarkable growth prospects or stocks which are currently trending in the market. Value investors tend to shun hot sectors while sticking with boring and predictable industry sectors like utilities. In this article we will discuss about eBay (NASDAQ:EBAY) , a stock with good growth prospects in the e-commerce sector and which is quoting at a reasonable price.
Attractive PE ratio, PB ratio and price to sales ratio
The one year forward PE ratio of eBay is currently 15.30. The stock will be considered expensive as measured by most value investing benchmarks; however it is cheap as compared to the industry average of 73.3. Similarly the Price to Book ratio is 3.3 which is significantly less than industry average of 4.8. The reason for such high valuations in e-commerce sector is the speculative component in the e-commerce stocks. The only multiple that is higher than the industry average is the price to sales ratio which is 3.9 compared to the industry average of 1.3. Over the past few quarters, the company has been maintaining their operating margins at approximately 20%, interest coverage ratio at 50 and the debt to equity ratio at 0.2. Comparing these values with the industry, we think that the company is attractively priced for many growth investors.
Solid revenue growth
Most importantly the revenues of eBay have grown at a compounded annual growth rate of 12.9% over the last five years, which is more than the industry average of 7.3%. The future growth prospects of eBay are as strong as any e-commerce company. eBay is usually associated with a marketplace which facilitates exchange of goods and eBay has done very well to achieve a substantial base for itself in the sector. The growth rate of eBay suggests that it has grown faster than its peers in the last 5 years.
eBay one year stock price chart
PayPal is the key value driver of future potential
The company’s core business is its marketplace. However, over the next few years the revenue generation will be higher from the payment processing business (the company owns PayPal, a name synonymous with online payments). The future growth prospects of eBay are more contingent on successfully positioning itself as a payment processor for all online transactions. Going with the trend, PayPal may be eBay’s biggest source of revenue in the nearby future. 40 percent of the total revenue of eBay is coming from PayPal and this is most likely to go up in the forthcoming years. As you can see from the figure below, the gap between the revenue from the market place division and the revenue from the PayPal division is narrowing down which implies that the PayPal business is picking up steam.
eBay revenue by segment
Moreover, with a market capitalization of close to $65 billion, eBay is also a very large company. Companies with large size are more stable, can raise debt easily and for these reasons there is a component of size premium in their valuation. They usually do not have much growth prospects due to “large base” effect. Large base effect refers to the fact that a small or medium size company will grow at a rapid pace in the initial years but it will find it more difficult to maintain that growth rate as it gets larger. Thus a stock owner in eBay gets the unusual combination of excellent growth prospects for a company with large size, which is trading at relatively modest price multiples. Hence the stock offers an attractive investment opportunity for growth investors.