Business as Usual: Why eBay Is A Buy

Richard Falvo, Staff Writer

While the broader stock market performed very well in pandemic-stricken 2020, its performance was dwarfed by that of e-commerce retailers. Though the S&P 500 gained 16.26% last year, a remarkable achievement in and of itself, the Amplify Online Retail ETF (IBUY), a low-cost fund that holds positions in publicly traded companies with significant revenue from the online retail business, appreciated almost 120% over the same time period. Such a performance, while impeccable, is not surprising. After all, the emergence of COVID-19 left the entire world cooped up inside their homes with a lot of time on their hands. Many people used this extra time to make online purchases. And as companies from Amazon and Wayfair to Chewy and Etsy saw their stock price explode in 2020, long-standing rival eBay (EBAY) did not receive nearly as much attention. This article will attempt to explain why investors should consider adding it to their portfolio.

Let’s begin on the fundamental side. In terms of cost of earnings, eBay offers investors the opportunity to purchase one dollar of the company’s earnings and cash flows at a substantial discount relative to its competitors. EBAY currently boasts a Price/Earnings (P/E) ratio of 7.77, meaning that for every one dollar of profits eBay generates as a firm, an investor currently pays $7.77. The P/E ratio is determined by a company’s price per share, as well as its earnings per share. It is a useful tool for calculating what an investor is theoretically receiving (in the form of earnings) relative to the price of an underlying stock. Currently, the average P/E ratio of online retail companies that are publicly traded on domestic stock exchanges is a whopping 133.68, suggesting the sector itself has become increasingly expensive in terms of valuation. Even major players within the industry, such as Amazon and Etsy, are posting rich P/E ratios of 76.22 and 117.76, respectively. Would you rather pay $7.77 or $76.22 per dollar of a company’s earnings?

Another, more useful measurement of a company’s valuation is referred to as the “Enterprise Value to Earnings Before Interest, Taxes, Depreciation and Amortization” (EV/EBITDA) ratio. In essence, the EV/EBITDA measures how much an investor pays for one dollar of a company’s cash flow, as opposed to its earnings. As a general rule, I find the EV/EBITDA ratio to be a more reliable measure of valuation. This is because it is quite easy for management to manipulate earnings figures to suggest their company is in a healthier financial condition than reality would suggest. In addition, earnings include non-cash accounting income, thus providing a broader scope for what a company is able to consider “profit.” Fortunately, the EV/EBITDA ratio fills in these holes nicely. In terms of specific EV/EBITDA values, eBay once again asserts a cheaper valuation than its competitors. Currently, EBAY has an EV/EBITDA ratio of 15.01. To put this into perspective, consider the EV/EBITDA ratios for Amazon (51.49), Etsy (76.52), Overstock (103.16), (318.62) and Alibaba (255.04). Such enormous ranges suggest that not only are many of the largest e-commerce firms incredibly overvalued, but that a few companies, such as eBay, remain reasonably valued, thus providing an opportunistic time to buy.

It is my belief that the market is currently mispricing EBAY. As a company, eBay has increased impressive growth in many key areas, including Gross Merchandise Volume (up 21% year-over-year) and Active Buyers (up 6% year-over-year), as well as Annual Revenue (up 18.93% from 2019) and Net Income (up 217.3% from 2019). While EBAY has gained over 20% since the start of the year, it is my belief that there is much more room for growth. For the reasons outlined above, I believe it is time to hit “Buy It Now” on eBay.