eBay Disappoints But If There’s A Cheaper Stock Out There I Don’t Know What It Is


eBay (EBAY) reported 3rd quarter earnings after the close today and while the 3rd quarter was okay their 4th quarter guidance was well below Wall Street estimates (EBAY 3Q Earnings Release).

They guided to EPS between 39 cents and 41 cents and revenues of between $2.020 billion and $2.170 billion while analysts were looking for EPS of 47 cents on $2.43 billion in revenues.  So they’re way under here.

The stock was down almost 14% in the regular session and is getting beat down even more in the after hours – down another 3% or so to around $14.80.

Their marketplace business is clearly deteriorating.  Gross Merchandise Volume ($), the amount of merchandise sold through eBay, declined by 1% compared to the year ago period – the first decline in the company’s history.  Net income growth slowed to 5% and is poised to go negative in the 4th quarter based on their guidance – they earned 45 cents a share in last year’s 4th quarter.

But the stock is RIDICULOUS CHEAP here.  They have just under $4 of cash and short term investments on their balance sheet and no debt.  The balance sheet is clean as a whistle.  So you’re paying $11 for the auction business and PayPal.  They’re still guiding to EPS of between $1.69 and $1.71 for 2008.  That’s a 6.5 multiple!  Hello! 

Even if earnings decline 15% in 2009, that’s still only a 7.6 forward multiple.  If earnings get cut in half next year, which won’t happen, that’s a 13 multiple. 

There is a big margin of safety here.  I can’t think of a non-cyclical stock that’s as cheap as eBay.  This is the cheapest stock I am aware of.  It’s no wonder legendary value shop Southeastern Asset Management owned 48.4 million shares of eBay at the end of the second quarter when eBay was trading for more than $27 a share – a $1.3 billion position at that time!

Even though their marketplace business is clearly suffering from internal problems and the weakening economy, this is still the #1 company in its space, with a fortress balance sheet, printing money quarter after quarter after quarter.  It’s too cheap here and I’d recommend it to anybody who understands value and is willing to hold on until the market starts giving it the valuation it deserves.

Disclosure: Top Gun is long shares of eBay (EBAY).

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