by Lawrence Meyers | July 24, 2012 9:00 am
A few months ago, I suggested that eBay (NASDAQ:EBAY) is no longer the market disruptor it once was because it had essentially become an online department store. Actually, it’s really the world’s largest online marketplace and trying to move into upscale goods as well.
I viewed it as a stalwart — nice earnings but not growth stock earnings, with solid financials. But after seeing the company’s latest earnings report, however, I may have misjudged that recharacterization.
The reason is PayPal’s potential. In my private equity work in the financial services industry, there is a big push toward mobile transactions. Despite criticisms regarding PayPal, it has become a brand name in payment processing, and I’m starting to see just how big it could be — as in big enough to rival credit cards like Visa (NYSE:V) and Mastercard (NYSE:MA) one day far down the road.
During Q2, PayPal processed $34 billion in transactions, which represents 20% year-over-year growth. This resulted in a 26% revenue increase. PayPal users jumped 13% to 113 million.
With respect to the mobile platform across both brands, eBay now expects some $10 billion in sales via mobile, increasing its forecast by 25%. eBay said 600,000 active users came from using a mobile platform. This is only going to grow.
In addition, eBay has started to create point-of-sale partnerships, which means banks like Bank of America (NYSE:BAC) and Wells Fargo (NYSE:WFC) may lose transactions to PayPal. Imagine being able to use PayPal at your local Safeway (NYSE:SWY). This doesn’t even speak to the massive growth in payments via smartphones.
Analysts are now pegging revenue growth at 20% this year and 15% next year, which will generate 16.5% earnings growth this year and next. Going out five years, analysts now peg eBay’s growth at 13.3%. The company’s balance sheet just keeps getting stronger, as it generated $411 million in free cash flow this quarter alone. eBay now has $7.6 billion of cash on hand.
With a balance sheet this strong, eBay was able to raise $3 billion in bonds, with interest rates ranging from 0.7% to 4%. That’s cheap capital.
Is eBay a buy, and if so, how would an investor classify this asset? Right now, backing out the net cash position, the shares trade around 16x to 17x this year’s earnings, matching its growth rate. I think I’d reclassify it as a growth stock again, given the potential that PayPal has going forward. It’s certainly sitting on safe financial ground.
The auction business may not have been what it once was, but it’s still very profitable and generates lots of free cash flow. I think EBAY is a great addition to a portfolio.
Lawrence Meyers does not own shares in any company mentioned.
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