Bargain shares after the fall on Nasdaq: Ebay?

In the light of the 10% fall on Nasdaq yesterday we have been wondering today what might be out there in the way of opportunities (from memory the Nasdaq has now fallen roughly 50% from its peak).

There was a wholesale sell-off in the tech sector and we wondered whether everything should be tarred with the same brush. Just how similar say, are Dell and Ebay and Google in reality?

If you were looking to do some bottom-fishing for an opportunity then perhaps some worthwhile characteristics would be:

  • a stock that was pretty well disliked
  • a stock that had a nice balance sheet
  • a stock that was well diversified across multiple markets and geographical sectors
  • a stock without a sky-high valuation
  • a stock where some of the analysis looks uninformed

People hate Ebay

Unlike internet darlings such as Google or, Ebay’s halo is regarded as slipped by a lot of people, including Peter Lynch style investors who think because they use a product and it works it’s worth buying. Have a look at a 5 year chart and you’ll see it was trading at $58 3 years ago, as compared to 20 bucks today.  Analysts are pretty well split and there is ton of negative publicity out there from pissed-off sellers which you can find appended as comments to any discussion of the stock objecting to everything from changes to feedback ratings to Ebay’s attempts to ‘encourage’ their buyers and sellers to use PayPal.

Ebay’s balance sheet

Doesn’t look too bad. At a guess I would say there are going to be a lot of opportunities out there if you’re pulling in free cash flow of $2.1bn (2007) and you’ve got $3.4 bn sitting round to pick up other nice businesses which are not in such a good position because they’re busily building market share and not worrying about cash or profits and investors don’t seem to like that at the moment. And after probably seriously overpaying (from memory $2.1bn) for Skype they are hopefully not going to make that mistake again too quickly (management change might also suggest that with the departure of Meg Whitman).

Ebay is diversified

With basically 3 businesses: payments in PayPal, the much smaller communications business with Skype, and the merchant side auction business, Ebay has a few different bets. From memory about 40% of their income comes from outside the USA too.

Ebay’s valuation

Float over to Morningstar and you find Ebay’s fair value estimate at about $40. They say consider buying at $30. You can find some competitor analysis here but their price/sales, price/cashflow and PEG don’t look bad compared to some of their peers like Amazon, Google, and Yahoo.

Ebay angles off the analyst radar screen?

There may be a few bright spots that are being underestimated:

  1. PayPal is growing fast. In Ebay’s Q1 2008 (April) financial results [Morningstar analyst quote] “total payment volume from the Paypal online payment service increased 17% on the eBay platform and a remarkable 61% off the platform” . By ‘off the platform’ they mean people using Paypal accounts to pay for other stuff via other websites. Whilst there are other competitors it looks to me like Ebay is leveraging their auction position (under the guise of ‘safety in transactions’) to push Paypal where some of their competitors like Google can’t – another situation where Ebay could establish a pretty dominant franchise.
  2. When money gets tight where do consumers go to buy the cheapest products? Pawnbrokers seem to have been valued on the basis that they might benefit from a switch downmarket as with cheap supermarket chains like Aldi. Why not Ebay?
  3. Skype seems to be working better and better – there are lots of VOIP plays out there but call quality to normal phones seems to be good and there’s not a lot of other options when it comes to the utility of knowing people are there waiting to take your call and quick and easy ad hoc conferencing. For small businesses you could argue that Skype is becoming essential.

Other analysis of Ebay


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Posted under individual stocks

This post was written by mike on September 30, 2008

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