Why EBay Shares Can Make a Comeback

EBay (EBAY) shares were doing well this year until the company decided to split with PayPal in July. The effect of the split has been so severe that EBay shares have dropped 55% so far this year. But, in my opinion, this is an opportunity to buy more shares. Let’s see why.

Robust growth across the board

The payments and commerce segments of eBay are significantly enhancing their roles in international commerce, with notable increase in gross merchandise volume (GMV) on an FX neutral basis, growing over 6% compared to the previous period and overall payment volume grew 3 points to 28%.
However, weaker year-over-year foreign currency movements negatively impacted the top line growth rate of the eBay Marketplaces business by nearly 8 points.

Further, weaker local currencies in some key markets resulted in lowered demand for goods in export-driven markets such as the United States, affecting the expansion of its cross border trade. The e-commerce giant is expected to successfully offset the impact of local currency weakness through the accelerated launch of new and innovative products, driving significant sales volume expansion.

Optimizing its operations

EBay recently decided to cut 7% of its global workforce in an attempt to lower costs and preserve profitability. This will help the e-commerce giant to make up for weaker sales growth in an intensively competitive global environment with core competition from Amazon.com and the negative impact of a strengthening dollar on its overseas revenue.

Moreover, eBay is increasingly focused on optimizing its cost structure by eliminating non-core expenses and minimizing its workforce to successfully generate stronger free cash flow. Moreover, by improving its cash flow performance, eBay will be able to return more cash to shareholders.

For instance, last quarter, the company returned approximately $1.6 billion in free cash flow through a repurchase program executed in the first quarter, buying back 17.6 million shares of its common stock at an average price of $56.95. In addition, the company still has $3 billion of buyback authorization left with it.

Now, considering the company’s positive moves to improve its financial and operating performance, I’m not surprised to see that analysts are positive about the stock. For example, the consensus estimate among 40 investment analysts evaluating eBay suggests that the company will outperform the market.

This consensus rating has been maintained ever since analysts’ sentiments improved six years ago. The earlier consensus estimate had suggested investors to hold their position in the company, which means that analysts are more optimistic about eBay’s prospects going forward.

Conclusion

According to my opinion, investors should consider purchasing equity in eBay given its attractive valuation. It has a trailing P/E ratio of 13.52 and a forward P/E ratio of 13.41. Both these numbers are lower than the industry’s average P/E of 21.51, indicating that it is a cheap stock to buy. Additionally, the profit margin of 13.11% seems satisfactory. Moreover, eBay has a really robust cash position of $10.55 billion as compared to a low debt position of $7.62 billion. This clearly indicates that eBay is well-equipped to invest in growth moves in the future, making the stock a good buy on the dip.
Published on Sep 15, 2015
By Ayush Singh

Copyrighted 2016. Content published with author's permission.

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