Buying the stock today at $55 would represent a 3% gain in five years. Since I personally would like a higher return on my investment, I’ll wait for the stock to drop to around $40, which will represent a 10% gain. Further, I would need some sort of margin of safety, let’s say a 20% cushion, resulting in a buy price of around $30.
Right now, eBay is valued for little growth if it keeps on the same path as it has traversed for the past couple of years. Wall Street is pricing the stock with hopes of huge gains in the mobile space and e-commerce in general. If eBay misses earnings by a penny or if the market reacts to some unimportant news, it may be our chance to buy the stock.
eBay has proven to be a consistent money-machine and it still has plenty of room to grow. Wait for a pullback for a near-sighted event (like a miss in quarterly earnings estimates) to get the stock at a price poised for gains.
Risks
Let’s look at some of the risks with possibly investing in eBay. One of the biggest factors relating to eBay’s business is the economy. If another recession hits like the one in 2008, very few people will have the disposable income to buy products on eBay and sellers will stop listing items because of low demand, resulting in lower revenue.
In addition, customers have other options to buy similar products on Amazon.com, Inc. (NASDAQ:AMZN) and Wal-Mart Stores, Inc. (NYSE:WMT), as well as using sites like Google Inc (NASDAQ:GOOG) Shopping and Microsoft Corporation (NASDAQ:MSFT)’s Bing Shopping to compare prices among different sites.
Personally, I think eBay’s biggest threat is new items sold by Amazon and Wal-Mart. eBay dominates the used items market, and although the other two stores do sell used goods, eBay’s auction price model allows for cheaper prices for consumers. Furthermore, eBay’s rating system for sellers provides a clear way for consumers to decide if the seller is a good one, combating Amazon’s and Wal-Mart’s stellar reputations.
The bottom line
eBay Inc (NASDAQ:EBAY) has a large competitive advantage with its network effect of trusted buyers and sellers. There is plenty of room to grow with increasing online and mobile sales as well as other initiatives, like eBay’s same-day delivery service. Management has been around for many years and is heavily invested in the future of the company, and most of the financial analysis points to a growing business that is properly managed.
I would buy a very small position in eBay now (just because of the stellar financial numbers), but wait for future pullbacks to invest more, with the expectation that if the price drops to $30 to invest much more heavily.
eBay Inc (NASDAQ:EBAY) does have some risks, but as long as it keeps the network of buyers and sellers, as well as continues developing the website, brand, and mobile payment options, eBay can compete with the likes of Amazon and Wal-Mart Stores, Inc. (NYSE:WMT).
Alec Eiber owns shares of Wal-Mart Stores. The Motley Fool recommends Amazon.com and eBay. The Motley Fool owns shares of Amazon.com and eBay.
