eBay: Good Business With Unstable Value

Seeking Alpha’s quant rating for eBay Inc. (NASDAQ:EBAY) is currently Buy, ranked at 3.83. While the valuation of the company is graded C by quant, I see potential to invest in eBay despite the less-than-best valuation. Why? Primarily because the shares are 52% below their high, and the company’s growth, profitability, and balance sheet strengths support an investment at the lower price. In addition, based on discounted cash flow analysis and P/E ratio peer analysis, the company looks fairly valued to me.

Q3 2023 Operational Highlights

eBay’s customer offerings are still confined to the commonly recognized online marketplace. Surprisingly, the organization hasn’t developed beyond this, although I don’t see this as a negative when considering the investment potential of the stock. This niche market concentration with a large product set encompassed within it creates a specialization that makes eBay one of the dominant players in the online marketplace industry.

The company’s Q3 2023 earnings presentation outlined the continued forward-focused nature of eBay that remains contingent on its niche service set. Artificial intelligence can now write the descriptive text of products based solely on image uploads:

In addition, eBay stressed its 400+ million live listings shippable to international buyers, and further AI integration through smart targeting ads:

Both of these advancements make me confident in eBay’s innovative approach to its product and service set. In addition to these more subtle additions, eBay has recently introduced eBay Live, which gives customers the chance to ‘tune in and shop curated experiences with… influencers, hosts and sellers’. In Q3 2023, eBay ‘hosted over 1,000 eBay Live events growing GMV 4x quarter over quarter’.

Q3 2023 Financial Highlights

Q3 2023 has been a stable year for eBay, and Q3 revenue is up relative to Q3 2022:

While the revenue results are nothing magnificent, they do represent a maintained revenue stream, which is somewhat expected and remains impressive for a company with such high market saturation and in the highly competitive digital marketplace industry.

Advertising revenue has seen a noticeable uptick since last year and deserves a special mention, especially considering advanced AI capabilities that should be able to enhance this revenue stream in years to come:

The company also maintained its BBB+ credit rating:

The maintained nature of the balance sheet is further evidenced by my more detailed analysis of the eBay Q3 2023 full press release. Total liabilities have decreased from $15,697m to $15,285m, while total assets have increased from $20,850 to $21,184 from Q3 2022 to Q3 2023:

All of these financial elements from Q3 2023 foster confidence in eBay as a business. From my perspective as an analyst, I do not see any major red flags and although I am not a shareholder, I believe there is a compelling reason to become one when I analyze the company’s financials on a wider historical basis.

Further Financial Analysis

For example, I wanted to understand eBay’s operating income growth over time as opposed to revenue growth, so I used Seeking Alpha’s charting tool to compare both metrics over a 10-year timespan:

What’s evident is that the two have moved in relative correlation. However, since around 2019, operating income has increased significantly, while then seeing a reversion to the mean in 2021 and beyond.

As is the case with most companies harnessing AI effectively, I do envisage eBay to be able to increase operating income through automated processes in the near future. This is already evident in the Q3 2023 operational highlights outlined above.

In addition to strong operating margins, currently 20.84%, the company has a relatively strong valuation, including a palatable P/E ratio of 7.65. That’s not to be taken at face value, however, as the P/E ratio for eBay has been unstable. Notably through peer analysis, we can see eBay isn’t the only one in the consumer discretionary business:

Such unstable earnings are going to create and have already created volatility in the share price:

That makes discounted cash flow analyses difficult to perform because the instability of earnings creates uncertainty about what future growth prospects we can expect as investors.

However, on a free cash flow per share basis, taking into consideration a 10-year growth stage at 1.5% growth (the FCF average annual growth rate for the past 10 years), and a 10-year terminal stage at 1% growth, with an 11% discount rate, the company has a fair value of $41.19 per share. The current stock price is around $40. In that regard, I reckon the company is trading at a good price at the moment, but because of the earnings instability, is relatively fairly valued. However, I’m convinced if I were to buy the shares right now I would be able to get good returns based on the maintained revenue, strong balance sheet, and convincing forward operations.

Why I’m Not Investing

I’ve used eBay for as long as I can remember and I’m confident it has a strong business that can be maintained in years to come. Revenue growth on a five-year basis is growing at an average rate of 16.30% per year, and although the company’s revenue has been down since 2013, it has been growing steadily since it reached its new equilibrium:

Perhaps the major growth era is over for eBay. That doesn’t make it an uncompelling investment, it just means it’s going to see slower growth than some of the other more powerful players in the marketplace business like Amazon.com, Inc. (AMZN), who continue to dominate in multiple fields and advance into new growing arenas as technology persists to innovate.

Part of the reason I anticipate a slowdown in eBay’s growth is that it has a less aggressive approach to such innovation than companies like Amazon. Amazon’s AWS initiatives and continued investment in patents and advanced technology represent a ruthless approach to embracing and advancing the latest technology based on customer reactions. I don’t see evidence that eBay is taking the same rigorous approach to radical iteration in an ever-growing technological world. eBay’s AI integrations so far have shown a consciousness of the need to adapt to the new demands of technological innovation, but it has not yet presented evidence that such integrations will make a compelling advanced marketplace in decades to come that is competitive with companies dedicated to elite AI tools and patents.

I’ve compared Amazon and eBay on all-time revenue growth to give readers an understanding of the financial effects of Amazon’s approach versus a less effective company at innovation like eBay:

I’m not investing in eBay because the business is good, but in my opinion, the financials and results of operations mean it isn’t great. That, along with the overarching instability in earnings impacting the valuation, means my analyst rating is Hold.