Bullish On Ebay

I’m bullish on eBay (EBAY) pretty much for the same reasons why I published Sell recommendations on Amazon.com and Facebook in recent days. It’s all about the combination of growth and sentiment, and the Street’s tendency to mess up quite often when it comes to this approach.

ebay-image

The Logic Behind My Position

For most, including me, I believe objective rules-based strategies are far superior overall to seat-of-the-pants genius. This approach will periodically steer me wrong on individual stocks, but my long experience shows that it points me in the right direction far more often than not. Even where it does go wrong, it tends to do so in ways other than what I anticipate at times when I try to second-guess the model. So like my recent Sell recommendations for AMZN and FB, this Buy recommendation on EBAY is based on probabilities.

The probabilities in both instances involve the investment community’s tendency to make a mess of things when it gets particularly bullish on shares of rapidly growing companies, so much so, that it can pay to simply bet naively on the Street’s ability to misjudge growth stocks. Hence my bearish stances on AMZN and FB. Switching gears, the Buy screen that now calls EBAY to my attention was created as a flip-side version of my earlier Sell screen. I’m now looking for situations in which the Street is likely to also miss the boat when dealing with companies that have had some struggles, as has been the case with EBAY. The model is further described below, after the discussion of EBAY.

A Bullish Case for eBay

EBAY has not been hot lately. In May, 2014, it was plagued by a security breach – an experience which sadly is far from unique in the online world and one that casts dark clouds over businesses for a long time. And on top of that, the online flea-market aura it has traditionally had, while cool in the early days of the internet, is not so wonderful in this generation. Now e-activities are taken for granted and users are more interested in finding what they want to find and doing what they want to do without pausing to experience a sense of circa 2000 newbie amazement. It also doesn't help that by comparison, Amazon.com has been getting bigger and better in eBay’s e-commerce neighborhood. And as if that were weren’t enough, the major search engines, in their quest to continue to provide users with the most relevant search results possible, upgraded their algorithms in ways that wound up giving less prominent placement to eBay’s old-school presentations.

We must, however, maintain some perspective. It’s not as if the company is in trouble.

With 2014 in the rear-view mirror, along with that year’s big deficit-producing write-off, the company’s return on assets over the trailing 12 months was 9.58% versus a 4.84% S&P 500 median. The company has a debt-to-equity ratio of 1.32, versus an S&P 500 median of 0.84. But it can well afford its borrowings, as indicated by its 10.35 interest coverage ratio (versus 7.74 for the S&P 500). Also, eBay’s high return on equity, 27.95% versus 14.28% for the S&P 500, suggests the debt is being deployed productively.

The problem, so to speak, is that good, or even very good, isn’t good enough when investors have been expecting more. And when a company is seen as being in a business similar to that of a firm like Amazon.com, which has been on a tear, investors expect a lot. Sales growth rates that may be more in line with what we think of as struggling brick and mortar (3.64% in the trailing 12 months and a minus 1.26% rate over the past five years, and even the improved 5.62% rate of the latest quarter) absolutely does not cut it for a company like eBay. The P/E ratio is OK at 13.67 times estimated results for the next fiscal year (versus 16.62 for the S&P 500). But the price/sales ratio, 3.65 versus 2.31 for the S&P 500, raises too many eyebrows.

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Comments

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Doug Morris 2 years ago Member's comment

I couldn't agree with this article more. #eBay has always been underated, overshadowed by #Amazon's success. But ebay isn't going anywhere. It's still the best place to go if you need to sell an item, and far safer than a place like Craig's list. $EBAY $AMZN

Mad Money 2 years ago Member's comment

At least I still don't have to pay sales tax on $EBAY! That gives them an advantage over $AMZN in my book.

James Hunter 2 years ago Member's comment

I have a love/hate relationship with #Ebay. I agree it is still the go-to place to sell my stuff. They've done a great job on cornering the auction market. That being said, I think they've completely dropped the ball and let #Amazon eat into their overall used-goods market share. They consistently fail to be innovative while Amazon is always leading in innovation. Perhaps the company's foray into structured date will have an impact as the author suggests.

$AMZN #EBAY

Bruce Powers 2 years ago Member's comment

Good read, but you lost me on the whole structured/unstructured data concept. When I want to find an item on #eBay, I do a search for that item. Why would I care who the seller is, or where he lives, or what letter his last name starts with? What am I missing?

$EBAY

Danielle Rogers 2 years ago Member's comment

Excellent article Marc Gerstein. You talk about your last Sell article. Do you have the link? I'd like to read it too.