EBAY Growth Decent But Declining
Friday July 18, 10:28 am ET
By Rob Plaza, CFA
eBay, Inc.'s (NasdaqGS: EBAY - News) second quarter EPS were $0.02 above our estimate. Those results were overshadowed by weak growth in the company's gross merchandise volume, which increased just 8.3% year-over-year, and disappointing guidance for the second half of 2008. Macro headwinds, competitive pressures, and a slowing in its core business continue to weigh on the company's stock price.
The company's powerful business model, which requires no inventory and little capital investment, continues to produce solid growth, hefty profit margins, and substantial free cash flow. These positive attributes helped the company deliver solid results in the second quarter of 2008. The company's continued growth has enabled eBay to invest in or acquire businesses outside its core U.S. auction business.
By expanding into these new areas, such as payment services (PayPal), foreign markets, communications (Skype), or ticket reselling (Stubhub.com), eBay is working to ensure that it will be able to maintain its growth rates in the years ahead. Moreover, eBay has a rock solid balance sheet. We maintain our Hold rating on the shares.
Shares of eBay are currently trading at 15.0x our 2008 pro forma EPS estimate and 13.3x our 2009 pro forma EPS estimate. We think this valuation is reasonable in light of eBay's decent but declining growth and $3.05/share in cash. Our six-month target price of $27 is about 14x our 2009 EPS estimate.
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