Back in February, I laid out a few reasons why eBay (NASDAQ:EBAY) stock was getting ready to charge up in 2020, including that the company had successfully re-engineered its “garage sale” e-commerce model to be more relevant to modern online shoppers – a move which I expected to spark better-than-expected revenue and profit growth over the following few quarters. Fast forward five months. EBAY stock has indeed charged up.
Year-to-date, shares are up more than 60%, mostly on the back of the novel coronavirus pandemic creating unprecedented tailwinds for the online retail sector.
This rally isn’t over just yet.
Covid-19 online retail tailwinds will stick around for the foreseeable future. As a result, eBay’s numbers will remain impressive, propped up by these tailwinds as well as core operational improvements. Plus, the stock still has more room for valuation upside.
As such, the next stop for EBAY stock is $60.
Here’s a deeper look.
Strong Fundamental Trends for EBAY Stock
The fundamental trends underlying EBAY stock are highly favorable.
On a macro level, you have the Covid-19 pandemic, which has created a rising tide for all e-commerce companies. Rest assured, the pandemic will fade. Its impact on shopping habits, however, will not.
Essentially, during Covid-19, everyone was forced into the online shopping channel, even those who were adverse to online shopping before. Chances are quite high that this influx of new shoppers into the online channel will like what they find. The online shopping experience has truly evolved – with things like next-day delivery, chatbots and personalized recommendations – to become as robust as the physical shopping experience, just with elevated convenience.
Consequently, Covid-19 has permanently accelerated e-commerce adoption. Shoppers who migrated online during the pandemic will go back to physical stores when they open up. But not as much as they used to. And the frequency with which they do go to physical stores will only continue to drop over the next few years as the online shopping experience gets better.
To that end, current Covid-19 tailwinds pushing up the entire online retail sector – eBay included – will moderate over time, but never fade.
Meanwhile, on a micro level, eBay management is finally doing everything right to stabilize this platform’s share in the e-commerce market. Improvements are largely centered around making eBay.com look more like a modern e-commerce website, and less like a Craig’s List of online retail.
All in all, then, eBay’s macro and micro fundamentals are good today – and getting better. Such favorable fundamentals should support continued gains in EBAY stock.
Valuation Upside to $60
My numbers suggest valuation upside to $60+ levels for EBAY stock.
The logic and numbers are fairly simple.
Global e-commerce sales have been rising at a 15%+ pace for the past several years. Given Covid-19 adoption tailwinds, the market should sustain 10%+ sales growth for the next several years.
In that market, eBay’s market share has been steadily shrinking. But, management making the right moves today to modernize the platform should help the company start to moderate its share erosion.
As that happens, last year’s 2% FX-neutral revenue growth rate will improve toward a steady, 3% to 5% revenue growth per year cadence over the next few years.
Management is also doing everything in their power to cutback on unnecessary spending. Against the backdrop of revenue growth, expense reductions should drive positive operating leverage and gradual profit-margin improvements. Big buybacks will factor in, too.
Connecting all the dots, eBay realistically projects as a 10%+ earnings grower over the next few years. On that assumption, I see the company earning anywhere between $5 and $5.50 in earnings per share by 2025.
Based on a market-average 17-times forward earnings multiple and a 10% annual discount rate, that implies a 2020 price target for EBAY stock of anywhere between $58 and $64.
Bottom Line on EBAY Stock
The best of the 2020 rally in EBAY stock has already come and gone.
But that doesn’t mean the rally is over.
Rather, it just means this stock won’t rise another 60% from here. But, on the back of strong e-commerce tailwinds and core platform improvements, EBAY stock will likely continue to grind higher over the next 6+ months.
Prices above $60 and even closer to $65 seem doable by the end of the year.
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 did not hold a position in any of the aforementioned securities.
