The early days of online auction site eBay (NASDAQ:EBAY) were like the town of Deadwood during the Gold Rush. You could sell your junky old stereo and get 70% of its retail price, even if it was years old. Because markets were just being established, prices had not settled, so you could fetch a lot more for that headless Don Quixote statue on your desk than you would today.

It also was proof that eBay’s business model would work and generate a lot of profit for the company. Indeed, like most other tech stocks of the late ’90s, eBay’s stock was a 15-bagger at one point. Unlike most other tech stocks, however, it actually had a business model, so its price did not collapse as viciously as others and even went on to spectacular highs ($58) in 2005.

The stock, however, never reached those same heights again. In fact, eBay is 50% off those highs to this day, though off its financial crisis low of $10. The question is whether eBay is still a viable business and whether the stock is worth a look.

For those living under a rock, eBay is an online marketplace where people can offer items for sale across the globe. It also owns PayPal, the online payment processor. At first, there was nothing else like eBay. Now, however, competition exists in the form of Craigslist and other sites.

But another big issue took over that, frankly, I didn’t expect to happen. It appears eBay is economically sensitive. You might think that when times are bad, people might flock to eBay to find used items, gray-market items and heavily discounted new items. That’s true to some extent, but that doesn’t mean buyers were willing to pay what sellers were asking.

Even worse, pricing and margin pressures took hold. EBay became so popular and so effective that merchants began offering their products on the website, creating price wars. You can see for yourself. Enter the type of laser printing cartridge your computer uses into eBay’s search function. Watch as dozens of refurbished, compatible and new cartridges appear in the results, offered by dozens of vendors, all fighting over pennies. In addition, commodities like home theater equipment no longer fetch much of anything, even if they are brand new!

How does all this affect eBay? The company charges some of its fees based on selling price. Ouch. So while eBay may not be the high-flying growth stock it once was, it still appears to be a completely acceptable marketplace that still is growing. The world, after all, is a big place.

Analysts looking out five years see annualized growth at a respectable 12%, including 16% this year and 15% next year, on healthy revenue increases of 25% and 17.5%, respectively. Not bad at all. In addition, eBay is a high-margin business. It doesn’t stock inventory. Net margins are 17.4%. The company carries $2.9 billion of net cash, or about $2.30 per share. Even better, the company pumps out consistent free cash flow of $2 billion to $2.5 billion annually. So far this year, that number stands at $1.08 billion.

Conclusion

Backing out the cash hoard, eBay trades at a P/E ratio of about 14, giving it a PEG ratio of a little under 1.0 on this and next year’s earnings, and a little over 1.0 on a five-year basis. This would suggest it’s fairly valued. Given the strong cash flow and financial position, those seeking modest price appreciation might want to consider buying.

As of this writing, Lawrence Meyers did not own a position in any of the aforementioned stocks.