- eBay's Earnings multiple is close to 2008 and 2009 levels when the eBay stock was trading at up to 50% lower than current levels.
- eBay's recent agreement with Tianjin municipal government in China should boost the company's base in China.
- The growing e-commerce tailwind will help eBay's growth. Risk to the downside is less compared to competitors with higher valuations.
The Fed's recent dovish comments in relation to the pace of interest rate hikes in the US has definitely put a floor under the dollar for the time being. Commodities such as gold and oil rallied hard on the Fed's announcements and analysts are now wondering whether this could signal a permanent top in the dollar index. We will have an idea in the next few weeks as I'm expecting a bounce back to at least the 96.5 level as the 5 day RSI indicator has reached oversold levels (see chart).
A company like eBay (NASDAQ:EBAY) has much to gain if the dollar keeps sliding throughout 2016. In one way it needs dollar weakness to steady the ship considering the dire performance of eBay stock price over the last 4 months (down almost 19% since the 30th of November).
Furthermore, eBay's Q4 2015 earnings were nothing to write home about as revenue was basically flat on a rolling year basis. However, what really hurt the eBay stock price in the aftermath was the company's forward guidance of $2.05 to $2.1 billion in revenue and an EPS of between $0.43 and $0.45, which were both well below consensus estimates. However, I see guidance being revised up if the dollar index can remain below 95 as 60% of the company's business takes place in international markets and since US goods (which is a big export driver) are more expensive for international customers when the dollar is strong, we should see US exports gradually increasing if I'm right on my US dollar index assumption. Here are other strong reasons why eBay stock looks attractive at these levels.
In terms of valuation, eBay has a current earnings multiple of 17 and a forward earnings multiple of 11 which are undervalued as the industry's average is over 30. I simply don't see eBay stock as a value trap when you look at its metrics closely. Its active buyers for example reached 162 million in Q4 2015, which was a 5% increase over the same quarter in 2014. No matter how negative some bears are about this stock (due to its poor growth rates compared to the likes of Amazon (NASDAQ:AMZN), eBay will be helped by the e-commerce tailwind.
The market research company e-Marketer predicts that global retail sales will grow to $28.3 trillion by 2018 from $22.5 billion in 2014 and eBay which still accounts for almost 8% of all US retail transactions will certainly take some of this pie. Furthermore, eBay's cash balance and equity (both over $6 billion) is on par with debt numbers (another $2.25 billion to be issued shortly) and free cash flow came in at $3.37 billion last year. Since eBAY is only a facilitator and not a company that holds inventory, it makes money on transactions and so, transitioning the portal to being a provider of more new goods makes sense in the long term. Therefore, despite the company currently not paying a dividend, the company could easily buy back more stock which would be favorable for earnings and shareholders alike especially with the stock price at these levels.
China probably offers the greatest potential in the e-commerce space and eBay has pounced on the opportunity. The e-commerce company recently signed an agreement with the Tianjin municipal government where the objective is to help Chinese companies export their products through eBay's e-commerce portals. The governments "stamp of approval" is significant here and eBay should definitely see a meaningful increase of Chinese sellers doing business on its platforms. Some analysts have stated that this move will adversely affect eBay's US sellers as cheaper products from China will, undoubtedly, be available for sale on eBay but I believe eBay made the right move here. Although eBay has a significant US seller base, sellers will have to become more resourceful over time to stay competitive as more and more products become available online. And remember eBay's goal is to increase the number of transactions and sellers as margins on products in the responsibility of the respective sellers.
The debt that the company is going to take on will more than likely be used to buyback stock or acquire smaller companies. Why? Well, buybacks make sense at present but what shareholders would really like to see happen would be a meaningful expansion of StubHub outside the US. StubHub (largest ticket marketplace in the US) grew at a 30% clip last quarter (see chart) so international expansion of the platform has to be foremost on the agenda one would think.
Furthermore, there have been a few updates recently that should boost StubHub's sales in the near term. Firstly, StubHub offers the ticket buyer a view from his or her seat before purchase. This little trick definitely incentivizes the purchase and many smart sellers know this so they buy good tickets well in advance of the event in order to sell them at a higher price later on. This suits eBay perfectly as the more the activity (buying and selling) that happens around a given ticket, the more the company makes through booking fees. Moreover, the platform should see even more booking fees, going forward, as a result of its intention of being a successful primary ticket seller. It has already partnered with Philadelphia 76ers and more agreements, undoubtedly, are on the way considering the low market share StubHub presently has in the primary ticket market.
To sum up, eBay has too much going for it for the stock to fall meaningfully from these levels. Its low valuation, strong growth in StubHub and Classifieds will eventually get noticed by the market which will lead a rally in the eBay stock price. China also is crucial and eBay seems to have its finger on the pulse there with the recent Tianjin deal. Furthermore, e-commerce sales worldwide continue to rise which makes me believe that we won't see eBay stock trading at prices much lower than current levels