Shares of eBay Inc. (Ticker: EBAY) have really woken up since we last profiled the company in September 2011. Priced at $30.17 a year ago, the stock recently traded above $44, a gain of more than 46%. The S&P 500 has come up in the last year as well, but the index’s total gain is less than half of eBay’s.
We’ve tracked eBay in the Investor Advisory Service since September 2006. Company financial performance has been good during that time. Revenue has more than doubled, and EPS has more than tripled. However, the stock’s performance has mostly followed the market. EPS growth was counter-balanced by a declining P/E. Any brief deviations relative to the S&P were small and tended not to persist. That is, periods of outperformance were followed by periods of equal underperformance, and vice-versa. To be fair, it’s too soon to be absolutely certain whether eBay will hold its recent gains, but the magnitude of rally suggests to us this stock has finally managed to win a round on the rest of the market.
Nothing suddenly changed, except for market sentiment. We’ve been saying for years that the company’s PayPal subsidiary is a one-of-a-kind asset with excellent growth credentials. Investors may have overlooked PayPal in the past because of its relatively small size relative to eBay’s retail business, but five or six years of explosive growth will turn a little subsidiary into a big subsidiary. PayPal is now too big to overlook. Meanwhile, investors are really learning to appreciate the combination of secular growth and cash flow that the payments industry can offer. Take a peek at the performance of fellow IAS stock Visa. Meanwhile, management has been righting the ship within the marketplaces division, formerly known as “auctions.” Investors may not have realized how much improvement was going on behind the scenes within marketplaces, tending to view the unit’s continued growth as a kind of “last gasp.” No longer. Shareholders who happened to be on board when the market decided to take a fresh look at this company’s prospects have been rewarded.
We discussed eBay’s Q2 2011 financial report in the same issue that we profiled the company. PayPal scored its first $1 billion revenue quarter. Marketplaces growth was 19%. Charges related to an acquisition affected the quarter’s reported earnings. We were very pleased with the quarter, although the market basically shrugged. When a stock is out of favor, there seems to be a tendency for the market to continue to fixate on any marginally unfavorable news. Perhaps the costs associated with the acquisition affected investor perception.
Q3 again showed high-teens organic growth for eBay, including 32% growth within PayPal. Growth in EPS lagged revenue due to an increased tax rate. Seemingly fixated on every little possible bit of bad news, analysts began to wring their hands over the company’s forward guidance, which seemed to imply a sharply-reduced growth rate for PayPal. The stock continued to lag. Q4 brought more of the same: excellent growth and a flat stock price. We expressed some annoyance with the stock’s continued low valuation in our quarterly update on the company.
In April 2012, the market finally came to agree with us. On April 19th, shares gained 13% on the back of a solid Q1 financial results. The figures didn’t necessarily show much acceleration relative to recent quarters. The market just seemed to run out of negative sentiment to direct at these shares. Now that eBay is suddenly in favor, the stock can do no wrong. Shares repeated their Q1 trick after Q2’s results came out, leaping 9% on good earnings. Shares have stayed strong since. After years of banging theeBay drum, it’s nice to see the market finally start to respond. We think there’s more growth ahead, although with the stock finally performing well, value-minded investors might want to wait to buy, hoping the stock will give back part of its recent gains versus the market.
Disclaimer: This company was selected for review in part because of its performance over the past year. Any outperformance relative to the broader market is not necessarily indicative of performance of the broader Investor Advisory Service.