Is eBay Inc (EBAY) Reliant on Subprime Lending?

Competitors

Mastercard Inc (NYSE:MA) operates the world’s fastest payments processing network. It reported fourth quarter 2012 results with adjusted net income of $605 million, up 18% versus the same period in 2011, and revenues of $1.9 billion, a 10% increase. The company also noted that it is experiencing momentum in its mobile initiatives around the world and securing business in emerging markets.

Mastercard Inc (NYSE:MA)’s current market multiplier is roughly 27 based on a market capitalization of $64.1 billion, with revenues of $7.4 billion and average cash earnings of $2.4 billion at a margin of around 32%. The company’s buoyed multiplier might be justified as it has no credit risk, since it holds no loan receivables, and its very high profit margin and overseas opportunities are greater than average.

Discover Financial Services

Discover Financial Services (NYSE:DFS) is one of the nation’s largest credit card issuers. It reported net income of $551 million, or $1.07 per diluted share, for the fourth quarter of 2012, as compared to $513 million or $0.95 per share for the fourth quarter of 2011. The company’s credit card loans and Discover card sales volume both grew 6% from the prior year. The company is also shareholder friendly, recently increasing its dividend 40% and repurchasing about 10 million shares in the last quarter.

Discover Financial Services (NYSE:DFS)’s market value is around $21.6 billion and trades at about a 9 multiplier. This is based on revenues of $8.0 billion, average cash earnings of $2.3 billion and a margin of around 28%. Given its results and asset quality, this multiplier is probably closer to the current standard for payment processors that hold credit risk.

Conclusion

eBay Inc (NASDAQ:EBAY) has a history of consistent growth and profitability. Its stock market valuation is a testament to the market’s faith in a continuation of that trend. However, there is some evidence that eBay Inc (NASDAQ:EBAY) may be stretching conservative bounds to meet those high expectations. Investors might be well advised to review the quality of the company’s sales increases as well as the quantity just to be adequately informed.

The article Is eBay Reliant on Sub-Prime Lending? originally appeared on Fool.com and is written by Bob Chandler.

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