The recent market correction has created a few buying opportunities, and eBay Inc (NASDAQ:EBAY) might be one of them. The eBay stock price has pulled back about 15% since hitting an all-time high after Q4 earnings in late January.
Yet there’s not much reason for the decline. The market liked eBay’s Q4 report: shares jumped the following day. 2018 guidance looks solid, with revenue expected to grow 7-9% in constant currency and adjusted EPS expected to rise 12%.
Meanwhile, this long has been a steady, consistent grower and a leader in the auction space with minimal competition. Nothing’s changed in the past two months except the eBay stock price. And that seems to set up an opportunity.
The Case for eBay Stock
The case for eBay stock is pretty simple. The company steadily grows revenue and expands margins, leading to consistent profit growth. That growth admittedly stalled out recently (the adjusted EPS was $1.89 in 2014, and $1.88 two years later) but the investments made then are paying off. Profit rose 6% in 2017 and is guided up 12-15% in 2018.
Competition is minimal. eBay long since won the online auctions battle. Facebook, Inc. (NASDAQ:FB) appears a potential threat through its Marketplace, but so far has made little traction. Indeed, eBay has partnered with Marketplace, hardly the action of a company who sees a substantial competitive threat.
Amazon.com, Inc. (NASDAQ:AMZN) has a solid third-party business as well, but so far both eBay and Amazon appear able to co-exist.
Meanwhile, the business of eBay isn’t just eBay. Online ticket seller StubHub drove 10% of 2017 revenue, and almost certainly is more profitable than the legacy business. Its “take rate” (the percentage of price that goes to eBay) is almost triple that of the Marketplace business.
Over the next few years, eBay will shift its primary payment option to Europe’s Adyen, who will replace PayPal Holdings Inc (NASDAQ:PYPL), which eBay spun off in 2014. eBay expects the move will lower costs for sellers and could potentially allow eBay to improve its own margins.
On top of all that, the eBay stock price looks downright cheap. Backing out a modest amount of net cash, EBAY trades at about 16x earnings. Free cash flow guidance of $2.1-$2.3 billion for 2018 suggests an ~18x P/FCF multiple, and back toward that 16x level excluding the impact of a one-time repatriation cash tax payment.
The bull case for eBay stock isn’t the most compelling in the tech space. There are faster-growing and potentially higher-reward retailers like Wayfair Inc (NYSE:W), among many others. But few stocks in the sector are cheaper. And eBay has enough room to steadily, if modestly, grow cash flow, and at ~$40 create above-market returns.
Is the eBay Stock Price Too High?
To be sure, not everyone sees eBay the same way. On this site, Luke Lango argued two weeks that the eBay’s rally was coming to an end. Lango predicts further deceleration in revenue growth thanks to competition, and potentially margin compression if eBay needs to challenge those rivals.
There is a case against eBay stock. The online world continues to change, and even moves by companies that aren’t direct competitors may have a modest impact on eBay’s traffic and revenue. eBay still is competing against Amazon. Walmart Inc (NYSE:WMT) is ramping up its e-commerce/’omnichannel’ efforts.
Indeed, pretty much every brick-and-mortar retailer now has an aggressive online offering, something that wasn’t the case even two to three years ago.
The Bottom Line on EBAY
But back at $40, the argument for eBay stock is that it simply isn’t pricing in that much growth. Between some level of volume growth, share repurchases, cost control, and the Payments transition, there’s enough to eke out high-single-digit to even low double-digit profit growth annually.
At 16x earnings, that’s enough. And while that isn’t the type of story most associated with high-risk, high-reward online plays, it’s still an attractive story.
Investors shouldn’t expect the eBay stock price to double within three years. But from here, eBay stock looks like it has a reasonable chance of providing above-market returns in a rising market and some level of safety in a downturn. That’s not the sexiest story in the market – but it’s still one worth buying.
As of this writing, Vince Martin has no positions in any securities mentioned.