EBay Inc.

-0.89 (-2.03%)
7:46:44 PM EDT: $42.99 +0.13 (+0.30%)
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Ebay's Critical Moment of Survival Is Right Now



eBay finds itself in a period of transition. Auction revenue is down significantly and the trend is rather obviously down. Many people ascribe the drop to a sort of acquired IQ in terms of on-line sales where people are no longer "treasure hunting" and more comfortable with mainstream sales (and less patient for auctions to end).

eBay has focused time and money into the "Click & Collect" world, which is quite different from its original business strategy of being a digital marketplace for consumer-to-consumer sales. The company is also looking at same day deliveries, although its enthusiasm is tempered by shipping costs. Interestingly, Amazon.com (AMZN) and Google (GOOGL) are both going full throttle into the same day delivery segment.

Finally eBay is setting its sites more myopically on something called "eBay deals" which generated over $1 billion in merchandise sales during the 2014 Thanksgiving weekend. In all, eBay is adapting, changing, being flexible and while the transition may be difficult, the bullish thesis here lies squarely on the idea that eBay's willingness to change will become an avenue for growth. The bearish thesis is a rather scary one that leaves eBay in the dust as a relic of the "old" Internet, unable to compete in new segments already dominated by the best of the best in technology.

Of course the other big news for eBay is the spinoff of Paypal effective July 17th. Interestingly, Paypal just acquired XOOM (international money transfer company) for nearly $900 million. Without focusing too much on Paypal, the goal for the soon to be independent firm was to gain access to non U.S. markets.

EBAY's revenue (TTM) has risen for more than five consecutive quarters. All told the company's fundamentals look better than worse, but are in the greyish area of "pretty good, but not great." We'll see what's working and what isn't through visualizations.

Technicals   |   Support: 59.37   |   Resistance: 61.93   

Golden Cross Alert:
The 50-day MA is now above the 200-day MA.
Swing Golden Cross Alert: The short-term 10 day MA is now above the 50 day MA.

EBAY has a five bull (top rated) technical rating because it's trading above its 10-, 50-and 200- day moving averages and the stock is up on the day.

Here are the consensus estimates for next quarter. Note that last quarter's actual result is included at the far right.
Earnings Date EPS Revenue (Mean) Revenue (Median) Last Quarter (Actual)
2015-07-16 $0.58 $4,483.6 M $4,486.7 M $4,448.0 M Provided by ZACKS

Let's look at the core elements that drive the company's fundamental rating.

Fundamentals Rating Summary

Revenue (TTM US$ Millions) 18,088 16,561 14,543

Operating Margin (QTR) 1.267 1.26 1.27 RISING

Net Income (TTM US$ Millions) 2,998 -147 2,716 RISING

Levered Free Cash Flow (TTM US$ Millions) 1,665 5,884 1,460 FALLING

Research and Development (US$ Millions) 485 480 434 RISING

Research and Development Expense/Revenue 0.109 0.113 0.116 FALLING

Stock Returns and Chart

EBAY is up +8.3% over the last three months and up +10.2% over the last six months. The stock price is up +22.5% over the last year.

Before we dig into the fundamental trends that drive the rating, let's look at a two-year stock chart with regression channel and 10-day momentum (on the bottom).
Click here to interact with this stock chart

Now let's examine the visualizations of the critical financial measures.

Revenue (TTM US$ Millions) 18,08816,56114,543

Revenue (TTM) is trending higher meaning that it has increased for at least five consecutive quarters (in this case about 20 consecutive quarters). Revenue over the trailing twelve months (TTM) is up 9.2% year-over-year and 24.4% over the last two-years. Growth is slowing, but let us note that we are still talking about growth.

What do all these numbers mean?
EBAY's fundamental rating benefited these results:
1. The one-year change was positive (but no extra points were given for a large percentage increase).
2. The two-year change was positive.
Finally, the up trend (consecutive quarters) in revenue benefited the fundamental (star) rating.

Let's look at Revenue (TTM US$ Millions) in the chart below.

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Before we move past revenue, let's examine a rather remarkable metric for eBay which is revenue per employee. If we look at technology firms between $45 billion and $105 billion in market cap with revenue per employee on they-axis and equal spacing (rank) on the x-axis, we'll see eBay is second only to Priceline (PCLN).

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Net Income (TTM US$ Millions) 2,998-1472,716RISING

Earnings get a little wonky for eBay. Net Income (after tax profit) over the trailing twelve months (TTM) is up from a $147 million loss to now a profit of just under $3 billion. We can see in the chart below the massive write-off quarter ending March 2014. That quarter sort of kills the easy trend, but in general, net income has topped a bit, but still shows some sign of growth. We do note that eBay hit an all-time in net income (TTM) back in Sep of 2012. So, the firm is years away from all-time highs.

In our next chart we plot Net Income (TTM US$ Millions) in the blue bars and the quarterly results in the gold line. Note the rising bars from a year ago (four quarters ago).

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Levered Free Cash Flow (TTM US$ Millions) 1,6655,8841,460FALLING

Levered Free Cash Flow (FCF) (TTM US$ Millions) is a critical determinant of stock price since market cap is the present value of all future free cash flows. For EBAY the metric is falling, down 72% year-over-year. In fact, the last time FCF (TTM) was this low was back in March of 2013. This is a part of the "pretty good but not great" fundamentals. FCF combined with net income paint a prety clear picture that eBay is having trouble breaking out any further. For our next chart we plot Levered Free Cash Flow (TTM US$ Millions) in the blue bars through time. Note the falling bars from a year ago (four quarters ago).

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Research and Development (US$ Millions) 485480434RISING

If you're trying to wrap your mind around the bullish thesis for eBay, this is where it lies. Research and Development (US$ Millions) in the most recent quarter for EBAY was $485 million up nearly 12% over the last two-years. While there's been a bit of a drop, as long as that trend doesn't continue, we can see that the firm is willing to put money into R&D, which is essentially, a willingness to change and invest in the future.

In our final time series chart we plot Research and Development (US$ Millions) in the blue bars and R&D per dollar of revenue in the orange line.

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eBay has seen revenue (TTM) break all-time highs for about twenty consecutive quarters and generates more revenue per employee than all but one of its technology peers. Earnings and free cash flow have hit a wall, while R&D remains high. The firm has clearly conveyed a willingness to change from its original business model and does recognize quite well that the auction business is slowly shrinking.

The bullish thesis for eBay is simply this: The firm is adapting and remaining flexible in its thought processes as it continues to invest in R&D and deploy new delivery models like "Click & Collect" and new marketing campaigns like "eBay deals."

The bearish thesis for eBay is that its expertise and dominance exists in a business model that is shrinking, and if it enters into the mainstream on-line sale realm, it now faces King Kong competition from many sources, not the least of of which is Amazon.com (which makes $83,000 in sales per minute) which invests nearly 20-fold in R&D and has welcomed the opportunity to try same day delivery. The bearish thesis leaves eBay as a relic of the "old" days, to be overrun by both more nimble and larger competitors.