The online auction site eBay (ticker: EBAY) has come a long way since 1995, when a Paris-born Iranian-American named Pierre Omidyar listed a single broken laser pointer as the first item up for grabs. It was probably worthless, but think how much that item would fetch now as a pop culture artifact.
Yet where pop culture junkies collect their trinkets, investors have spoils of another kind in mind. And with eBay’s fourth-quarter earnings report, released after the market closed Wednesday, mixed signals might at least compel them to make a calculated, cautious call to “buy it now.”
First the good news: Adjusted earnings of 50 cents a share and revenues of $2.3 billion met Wall Street expectations. EBay’s active buyer base also grew 5 percent to 162 million. But the company issued weaker-than-expected guidance for the current quarter, forecasting quarterly revenue of $2.05 billion to $2.1 billion and adjusted earnings per share of 43 to 45 cents. Analysts had forecast $2.16 in revenue and EPS of 48 cents, so the disappointing forecast sent investors fleeing to safety — EBAY stock fell more than 12 percent in after-hours trading.
“EBay’s revenue growth rate has slowed, but it generates good cash flows and has a lot of cash on hand, which it should probably use to begin paying a dividend,” says Stephen Ciccone, associate professor of finance and department chairman at the Peter T. Paul College of Business and Economics in Durham, New Hampshire.
At the very least, eBay stock has a compelling past. Omidyar became an instant billionaire at 31 with eBay’s initial public offering in 1998. He certainly padded that nest egg even more when eBay spun off PayPal (PYPL), its payments arm, in July.
But in terms of that spinoff, it’s generated all the momentum of four broken Hot Wheels up for auction. After the July 20 spin date, PayPal’s stock has sunk 20 percent, although it’s up dramatically following PayPal’s own positive quarterly earnings report this week. As for eBay, its stock hasn’t fared much better: off 7 percent post-PayPal IPO.
Grumpy Wall Street types could well blame activist investor and multibillionaire Carl Icahn. He’s made headlines of late for his recent round of salvos aimed at breaking up the insurance colossus American International Group (AIG) — to which the company responded Tuesday with partial concessions. But before that, Icahn pushed to split eBay in two, a process eBay started in late 2014.
As a result, “eBay’s potential is probably not as explosive as it once was,” Ciccone says. Yet before the spin, it was “a good performing stock in recent times, beating the S&P 500 over the past five years.”
Could it recover at least some of that mojo? Ciccone singles out some bright spots that, at the very least, could signal a solid future. “EBay has handily outperformed the much-hyped competitor Alibaba (Group Holding, BABA) since Alibaba started trading in September 2014,” he says. “And because of the nature of its business, eBay’s costs are low, which leads to relatively high margins.”
Positive as those signs are, analysts can be picky in their assessments; they don’t buy stock at online auctions, after all. The consensus reflects something of a split: Hours before the earnings report, seven analysts called eBay a “strong buy,” but more than twice as many (16) labeled it a “hold” — while one placed it in the “underperform” category.
Meanwhile, potential bad news for eBay is both present and forward-looking. It begins at the grass roots level with consumer dissatisfaction over sales fees — which has opened doors for niche competitors. Reverb.com, a Chicago-based musical instrument sales site, has picked up substantial market share; it charges a 3.5 percent flat fee per item sold, while eBay charges 10 percent.
EBay also lags far behind in terms of a social media component. “Sites that offer a unique social experience such as Etsy (ETSY) and Poshmark are also posing a challenge to the merchant business at eBay,” says D.J. Shaughnessy, portfolio manager at F.L. Putnam Investment Management Co.
The Internet’s big dogs are also sifting around eBay’s door. “From above, the looming shadow of Amazon (AMZN) is ever present and now eBay is faced with the emerging capability and deep pockets of Facebook (FB) and Google (GOOG),” Shaughnessy says.
There’s a positive perspective investor skeptics need to consider, says Eddie Miller, a serial entrepreneur who operates more than 17,000 domains under WeSell.com. “EBay is likely to benefit from the increase in interest that Americans have in e-commerce, not to mention the rise in interest on a global scale. EBay is looking more and more like a value stock, and those looking to invest in the tech sector would be well served to invest in the company.”
And while an eBuy, if you will, doesn’t seem sexy, experts say you might just get safety. As Ciccone puts it, “EBay may not be the most exciting stock to hold in its lower growth, post-PayPal form. But it has been a reliable performer.”
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EBay Stock Meets the Street, Keeps its Feet for Now originally appeared on usnews.com
