Online retail stocks have been on fire in 2020, thanks to the novel coronavirus pandemic which has accelerated the online shopping megatrend. Year-to-date, the Amplify Online Retail ETF (NASDAQ:IBUY) is up a jaw-dropping 36%. eBay (NASDAQ:EBAY) has been no exception to this trend. EBAY stock is up nearly 36% itself in 2020.
That’s impressive for this traditionally slow-growth e-commerce company. EBAY stock hasn’t risen more than 40% in any year since 2012.
But, the tide is starting to turn. Covid-19 hysteria is dying down. The physical economy is reopening. Consumers are getting back out into the real world. And, presumably, all of that means that eBay’s growth trends will meaningfully deteriorate over the next few months.
So time to sell EBAY stock?
Not so fast.
Covid-19 permanently accelerated the e-commerce megatrend, and as such, while eBay’s growth trends will normalize over the next few months, they should normalize at a higher level than where they were pre-Covid-19. At the same time, management continues to take all the right steps to improve the platform, cut costs, boost margins and grow profits. And, on top of all that, EBAY stock is still pretty cheap.
So, while common sense may decree that it’s time to sell EBAY stock, I think the fundamentals actually support this stock charging above $50 soon.
Covid-19 sparked an unprecedented acceleration in eBay’s growth trends. The company went from flat revenue growth in the fourth quarter of 2019 to a projected 15% rise in sales in the second quarter of 2020.
Of course, the second quarter of 2020’s 15% revenue growth rate is not sustainable. Over the next few months, the physical economy will reopen, and that growth rate will come down.
But, it won’t go back to zero.
Covid-19 permanently accelerated the online shopping megatrend, by forcefully introducing consumers to new online platforms. Because those platforms do offer elevated convenience, many of these shoppers will stick. They won’t do all of their shopping online now. But, where your average shopper may have done 10% of his/her shopping online before, that number will likely leapfrog to 20% or more coming out of this crisis.
In this sense, eBay isn’t returning to a zero-growth world. The company’s “new normal” will be low-single-digit revenue growth. This “new normal” will be boosted by management taking all the right steps to re-haul the eBay platform and make it more relevant to modern consumers.
At the same time, management is cutting back on spending and doubling down on share repurchases. The first action should boost profit margins. The second will reduce the number of shares outstanding. In sum, both of those actions will help boost profit growth.
Big picture: eBay’s core fundamentals are actually improving, if you ignore the abnormal second quarter boost from Covid-19, and therefore, this stock should be higher than where its been over the past few years.
For all the hype surrounding online retail stocks, EBAY stock is still pretty cheap, at just 16-times forward earnings.
That’s a dirt-cheap multiple for an online retail stock. Peer online retail stocks trade at much, much higher valuations. PayPal (NASDAQ:PYPL) trades at 51 times forward earnings. Amazon (NASDAQ:AMZN) trades at 106-times forward earnings. Shopify (NYSE:SHOP) trades at over 5,000-times forward earnings.
Sure, all of those peers are growing much faster than eBay. They deserve bigger multiples.
But, at 16-times forward earnings, EBAY stock is undervalued relative to its own growth potential.
Assuming eBay can sustain low-single-digit revenue growth on top gradual margin expansion and big buybacks over the next few years, then this company could realistically grow earnings at a ~10% annual clip to around $5 per share by 2025.
Using today’s 16-times forward multiple and a 10% annual discount rate, that equates to a 2020 price target for EBAY stock of around $55.
Thus, even if eBay doesn’t sustain its current red-hot momentum, the stock is still undervalued.
Bottom Line on EBAY Stock
Common sense may say sell EBAY stock. But the fundamentals say don’t. The core business trends here are improving, even as the physical economy reopens, and the stock is still undervalued.
As such, it looks like the big 2020 rally in EBAY stock isn’t over just yet.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he was long AMZN and SHOP.