In a sharp and sudden reversal, tech stocks fell off a cliff heading into Labor Day weekend, as many of the market’s biggest winners year-to-date turned into losers. eBay (NASDAQ:EBAY) stock was no exception. After rallying more than 60% in 2020 to all time highs, EBAY stock dropped more than 7% in a matter of two days.
This sell-off in EBAY stock — and in the broader tech sector in general — is little more than a buying opportunity.
The reality is that nothing is wrong with tech stocks besides the fact that they rallied too much. For months, these stocks could do no wrong. They kept pushing higher and higher and higher, to more and more extreme valuations. Eventually, gravity kicked in, and the result is a rapid sell-off in tech stocks to more reasonable valuation levels.
They’ll get to those more reasonable valuation levels. Soon. When they do, the sell-off will end, and the longer-term rally will resume, because the fundamentals underlying tech stocks remain as robust ever. That is, technology continues to disrupt every facet of our daily and professional lives, at an accelerated pace today because of Covid-19, and these companies’ influence, revenues and profits will only go way higher over the next 5 to 10 years.
eBay falls perfectly into this trend as one of the largest and most important e-commerce platforms in the world.
Plus, after this recent sell-off, EBAY stock is now attractively undervalued.
So buy the dip.
Here’s a deeper look.
A Long-Term Winner
eBay has forever been a low-growth company in the big-growth e-commerce space. But, thanks to the Covid-19 pandemic, eBay going forward will be a mild-growth company in the bigger-growth e-commerce market.
That is, Covid-19 has permanently accelerated eBay’s growth narrative.
Specifically, the pandemic has accelerated e-commerce adoption globally. Given that the online selling experience is quite robust, with ultra-fast shipping times, ultra-low prices and ultra-seamless browsing capabilities, it is very likely that many of the consumers who have pivoted to online shopping in 2020 will continue to shop online long after the pandemic fades from the scene.
Broadly, then, Covid-19 has created a multi-year tailwind for the entire e-commerce space.
This is a rising tide which will lift all boats, eBay included.
At the same time, eBay is taking all the right steps to improve its platform, by simplifying the listing flow, enabling sellers with tools like traffic data analytics and introducing a “dark mode” on the app.
To that extent, eBay is increasing its competitive positioning in the e-commerce space, at the same time that the space is booming.
This, of course, implies that eBay’s growth trajectory — which was previously anchored on flat growth with flat margins — will be increasingly characterized by mild, low single-digit revenue growth and incremental margin expansion going forward.
The recent market plunge has brought EBAY stock down to around $50, which is exactly where I said a few weeks ago that you should start buying the dip.
I reiterate that claim today. Buy the dip in EBAY stock at $50.
On the assumption that eBay can sustain low single-digit revenue growth and mild margin expansion into 2025, I think the company can do about $5 in earnings per share by then.
Based on a market-average 17X forward earnings multiple, that implies a 2024 price target for EBAY stock of $85. Discounted back by 8.5% per year, that implies a 2020 price target of over $60.
At $50, that’s a 15%-plus discount to fair value, which feels like an appropriate margin of safety to start buying the dip.
Bottom Line on EBAY Stock
The recent sell-off in tech stocks is a buying opportunity, and EBAY stock should be on your tech stock shopping list.
This is a high-quality e-commerce company, trading a discounted valuation, with high visibility to stable growth over the next few years. That’s a winning combination. So, once this sell-off ends — and it will, soon — EBAY stock will bounce back to $60.
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 rated one of the world’s top stock pickers 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.