EBAY INC. $48 (Nasdaq symbol EBAY; Aggressive Growth Portfolio, Finance sector; Shares outstanding: 1.3 billion; Market cap: $62.4 billion; Price-to-sales ratio: 4.8; No dividends paid; TSINetwork Rating: Above Average; www.ebay.com) launched its online auction site in September 1995. It now has 104.8 million users worldwide. The company charges users fees to list and sell their goods through its websites.
On top of used goods, the company is also selling more merchandise from retailers. That’s helping it compete with Amazon.com. Right now, sales of new items at fixed prices account for over 60% of eBay’s total transactions.
The company also operates several other highly popular websites, including StubHub (live event ticket sales), Shopping.com (comparison shopping) and Rent.com (apartment and house rentals). In addition, it has local websites that sell classified advertising in over 1,000 cities. In all, eBay’s websites provide 54% of its revenue.
eBay gets a further 40% of its revenue from processing online transactions, mostly through its wholly owned PayPal subsidiary.
The company bought PayPal in October 2002, mainly to handle payments on its auction websites. Since then, this business has opened up its services to other e-commerce sites. It now has over 113 million users and connects to over 15,000 financial institutions.
The remaining 6% of eBay’s revenue comes from GSI Commerce, which it bought for $2.4 billion in June 2011. GSI, which has over 500 business clients, sells services that help them process orders from their websites, respond to customer concerns and increase their online sales.
eBay’s revenue rose 51.9%, from $7.7 billion in 2007 to $11.7 billion in 2011. Much of this growth came from smaller e-commerce companies that eBay bought. GSI also contributed $590.1 million to eBay’s 2011 revenue.
Earnings rose 8.7%, from $1.6 billion in 2007 to $1.8 billion in 2008. Earnings per share rose 14.3%, from $1.19 to $1.36, on fewer shares outstanding.
Big gain on Skype sale
Earnings fell 25.2% in 2009, to $1.3 billion, or $1.02 a share. That’s because eBay sold 70% of Skype, which lets users make free voice and video calls over the Internet. eBay received $2.0 billion for this interest, and an additional $2.3 billion for its remaining 30% stake when software giant Microsoft Corp. (Nasdaq symbol MSFT) completed its purchase of Skype in October 2011.
eBay’s earnings then rose to $1.36 a share (or a total of $1.8 billion) in 2010, and to $1.60 a share (or $2.1 billion) in 2011.
The company operates in a highly competitive and rapidly changing industry. That’s why it spent $1.2 billion (or 10.6% of its revenue) to improve its websites and systems in 2011, up 36.0% from $908.4 million (or 9.9% of revenue) in 2010.
Some of these investments include changes that make it easier for mobile device users to access its websites. In 2011, its mobile transactions totalled $5 billion, up 150.0% from $2 billion in 2010. Many of these mobile users are also using PayPal to pay for their purchases: mobile payments soared to $4 billion in 2011 from $750 million in 2010. Mobile sales should jump to $10 billion in 2012.
“Digital wallets” have huge potential
PayPal is now developing software that will let consumers use their smartphones to pay for purchases in retail stores. Using near field communication technology, users can simply wave their phone over a scanning device to complete the sale. Demand for these systems should be strong, particularly because PayPal charges lower fees than credit card companies.
In addition, PayPal has teamed up with credit card issuer Discover Financial Services (New York symbol DFS). Starting in 2013, clients can use their PayPal accounts to pay for goods and services at the over 7 million U.S. merchants that accept Discover cards.
PayPal’s Bill Me Later service, which lets users in the U.S. buy goods on credit, is another growth area. A bank or other licensed lender provides the loan. PayPal then purchases it and collects the payments.
That adds to eBay’s risk, as some of these borrowers will not pay their loans back on time, or will default entirely. However, the lending bank checks the borrower’s credit history before approving the loan. That helps keep credit losses down. As of June 30, 2012, about 90% of these loans were current.
eBay’s long-term debt is $1.5 billion, or just 2% of its market cap. Moreover, it holds cash and investments of $5.8 billion, or $4.47 a share.
Even through its balance sheet is strong, eBay recently sold $3 billion of long-term notes. It will use the cash to retire $400 million of older notes due next year. The extra cash will also help it make acquisitions or take advantage of other growth opportunities.
P/e still reasonable after big rise
The stock has gained 55% since we first recommended it at $31 in our December 2010 issue. It now trades at 20.6 times eBay’s likely 2012 earnings of $2.33 a share. Its 2013 earnings could rise to $2.71 a share, which would give the stock a more reasonable p/e ratio of 17.7.
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