EBay (NASDAQ:EBAY) is up about 27% year-to date through Nov. 1. That puts eBay stock 230 basis points ahead of PayPal (NASDAQ:PYPL), its former stablemate.
EBay currently trades at 12.2 times its forward price-to-earnings (P/E) ratio and 2.67 times sales (P/S). PayPal, which was spun-off by eBay in July 2015, trades at a forward P/E of 28.7 and a P/S of 6.86, both more than double the current eBay valuation.
Yet, if I had to buy one, it would be PayPal stock. Here’s why.
eBay Stock Continues to Sputter
The good news when eBay reported its third-quarter results Oct. 23 was that its non-GAAP earnings were better than analyst expectations at 67 cents, three cents higher than the consensus. On the top line, analysts were expecting $2.64 billion in revenue. EBay delivered sales in the quarter that were $10 million higher than the consensus.
On a year-over-year basis, revenue was flat to last year, while its EPS was up 19% from 56 cents in Q3 2018. However, if you exclude the 30% share count reduction over the past five years, and consider net income on a non-GAAP basis rather than EPS, eBay’s net income rose by just 1.6%, a far more modest growth rate.
In fact, since PayPal was spun-off in 2015, eBay’s Q3 has seen non-GAAP earnings of $529 million (2015), $509 million (2016), $514 million (2017), $554 million (2018), and $563 million in 2019.
That’s a four-year compound annual growth rate of 1.6%.
No wonder activist investors have been calling on the company to sell its non-core businesses such as StubHub and Classifieds. Former CEO Devin Wenig disagreed with the plan, which is why he abruptly resigned in September.
Past Divestitures Have Not Worked
Despite eBay stock being up more than PayPal so far in 2019, it hasn’t been nearly as pretty since Carl Icahn forced the company to spin off the payments processor in 2015. PYPL stock has tripled since July 2015, while the EBAY stock price hasn’t even kept up to the S&P 500.
As the Motley Fool’s Danny Vena recently pointed out, eBay also made the mistake of selling its 18% stake in MercadoLibre (NASDAQ:MELI) in October 2016, leaving as much as $2.5 billion on the table based on MELI’s current share price.
Earlier this year, I recommended that if investors could afford to buy both MercadoLibre and PayPal, they should.
In five years, eBay has given up two big revenue growers, leaving very little to prime the growth pump except for the sale of StubHub and Classifieds. The sale of these two businesses will do nothing except lead to more share repurchases, which will continue to hide the fact that eBay’s core operations aren’t growing on either the top or the bottom line.
PayPal Stock Price Remains a Better Buy
While eBay’s sales and earnings continue to sputter, PayPal continues to grow. Over the next three years, PayPal’s revenues and operating income are expected to grow on an annualized basis by 18.7% and 18.4%, respectively. Meanwhile, Morningstar suggests eBay’s revenue and operating income will increase by 7.7% and 0.4%, respectively, over the same period.
From my perspective, I don’t think there’s any question PYPL is a better stock to hold over the next five years. Devin Wenig was smart to get out.
Do not buy eBay stock simply because it’s cheap. It’s cheap for a reason.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
