The number that I and everyone else will be focusing on is the GMV number, which was disappointing with only 8% growth.
– John Aiken (subscription required), Analyst, Majestic Research
eBay (EBAY) reported 2nd quarter earnings after the close yesterday (EBAY Earnings Release) and the stock is getting crushed today – down 15% on big volume.
From what I can gather, Wall Street is worrying about the effects of the overall economic slowdown on eBay’s business, with some justification I might add.
Gross Merchandise Volume (GMV) in the auction business was up only 8% year over year compared to 12%-14% during the previous 4 quarters. US revenues were up only 12% year over year compared to 16%-24% in the previous 4 quarters. Further, eBay’s 3rd quarter guidance came in a little light compared to Wall Street estimates.
But the company is a cash machine and represents compelling value at current levels. For starters, they have $3 a share in cash and short term investments with no debt. So subtract that from today’s $24 price and you get $21.
They’re forecasting $1.72-$1.77 a share in earnings for 2008. Taking the middle of the range, that’s a 12 forward multiple.
Revenue and Net Income, even if they are slowing due to a maturing auction business and the macroeconomic environment, will still almost certainly grow at a faster rate than that over the next 12 months for a PEG ratio (PE multiple/growth rate) below 1.
Free cash flow is almost always in line with net income meaning that the quality of earnings here is very high. Net income isn’t some accounting number. That’s cash that is going straight to the company’s balance sheet.
No wonder premiere value shop Longleaf Partners owns 50 million shares in eBay – a $1.2 billion stake that represents almost 4% of all of eBay’s outstanding shares.
Technically, today’s selloff puts eBay at 52 week lows and approaching 5 year lows around $23 reached during the Summer of 2006 making for an attractive entry point.
Disclosure: Top Gun is long eBay (EBAY) shares.