eBay Inc (NASDAQ:EBAY) actually beat consensus earnings estimates for the first quarter of 2013 by 1 cent, but underperformance on the top line caused the stock to fall on the day; it is currently down 6% since the beginning of April. Revenue actually grew 14% in the quarter versus a year earlier, with earnings up at a double-digit rate as well, though Q1 is generally soft for eBay Inc (NASDAQ:EBAY) and investors are likely more worried about what the revenue miss means for the business than pleased with the company’s financial performance. Marketplace revenue- for what might be called the core eBay business, though it represents only a little over half of sales- grew by 13% with a somewhat higher growth rate in the Payments segment (which includes PayPal).
The stock trades at 25 times trailing earnings, a level at which the market is counting on high growth for several years (therefore explaining why a revenue miss would be so troubling- good, sustainable growth rates there are necessary for improved earnings). Wall Street analysts expect $3.22 in earnings per share for 2014, which makes for a forward P/E of 16. eBay has been repurchasing shares- it used about half of its cash flow from operations last quarter in doing so- but even so the company will need to continue its high earnings growth rates in order to hit that target, and then will need to improve its net income further from there in order to justify the current valuation.
We track quarterly 13F filings by hedge funds as part of our work developing investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds outperform the S&P 500 by 18 percentage points per year on average); this database can also be used to find individual managers who have liked eBay. Billionaire and Tiger Cub Stephen Mandel’s Lone Pine Capital reported a position of 8.5 million shares at the end of December, though the fund had been selling shares during the fourth quarter (find Mandel’s favorite stocks). SAC Capital Advisors, managed by billionaire Steve Cohen, increased its stake by 82% to a total of 4.6 million shares (see Cohen’s stock picks).
The closest peers for eBay Inc (NASDAQ:EBAY)’s marketplace business are Amazon.com, Inc. (NASDAQ:AMZN) and Overstock.com (NASDAQ:OSTK). Amazon is actually unprofitable on a trailing basis, though many investors insist that the company could elect to shift its focus to margins rather than growth at any time. Revenue growth has been good, but we don’t think it’s wise to rely on the scale of improvement that would be necessary for a stock with a forward P/E of more than 70 to become a good value. Overstock.com has more than tripled in price in the last year, and with earnings rising as well the trailing and forward P/Es are now a bit above 20. 31% of the float is held short per the most recent data, as many market players are skeptical that high growth rates can continue.
Given the payments segment, we can also compare eBay Inc (NASDAQ:EBAY) to American Express Company (NYSE:AXP) and to Mastercard Inc (NYSE:MA). American Express delivered very low growth in both revenue and net income last quarter compared to the first quarter of 2012. Its trailing earnings multiple is 17; we’d generally have to see better financials in order to find a company intriguing at that pricing and so we would avoid it. Mastercard also looks a bit expensive to us, with trailing and forward P/Es of 24 and 17 respectively. Recent earnings growth has been very high in percentage terms, but that has been due to a very low base rate of net income and revenue numbers have been less impressive and certainly not strong enough for us to recommend the stock.
eBay Inc (NASDAQ:EBAY) and its peers are outside value territory, so the question is which of these companies- if any- can produce enough earnings growth to make their current price look reasonable. eBay Inc (NASDAQ:EBAY) actually seems to be one of the stronger candidates in relative terms in that regard, and therefore might be more worthy of further research than the other companies we’ve discussed. However, we would have to become more convinced of the prospects for sustainable earnings growth before thinking of it as a buy.
Disclosure: I own no shares of any stocks mentioned in this article.
