A data breach and a Google (GOOG) search algorithm change were key concerns heading into June for eBay (EBAY), but the firm’s same-store sales pace during the month showed that little could stop the fundamental momentum at the online retailing giant. Though the pace of its same-store sales expansion may never reach the breakneck rate of Amazon (AMZN), we prefer eBay’s profit focus and believe its competitive advantages are as strong as–or even stronger than–Amazon’s.
Here is the June same-store sales data from ChannelAdvisor (ECOM):
Amazon – Amazon’s June SSS came in at 34.4%, an increase compared to May’s 28.1%. The Amazon Fire Phone was announced in June and could have caused some knock-on effects.
eBay – eBay’s June came in at 12.3% up from May’s 11.5% indicating that eBay started to recover from the double whammy of the data breach and Google Panda problems from May.
All-in, ecommerce remains healthy, and we expect eBay’s stock to perform well in light of the sequentially stronger growth in the month of June. Many investors had been expecting a same-store sales decline at eBay during the period, and the acceleration is a very welcome data point, largely diffusing concerns over the data breach and search algorithm change. We expect the strengthening trend to continue.
Why eBay Remains a ‘Best Idea’
For the full-year 2014, eBay expects net revenue in the range of $18-$18.5 billion with non-GAAP earnings per diluted share in the range of $2.95-$3.00. Factoring in the current pace of same-store sales growth and considering no earnings leverage or share buyback acceleration (i.e. very conservative forecasts), we think ~$3.40 per share for full-year 2015 is a very achievable forecast, which is roughly in-line with consensus.
This means that, with shares at ~$51 each, the company is trading at just 15 times forward earnings. The current 12-month forward P/E for S&P 500 firms is 15.6. In our view, eBay has significantly better long-term growth prospects than the average S&P firm, and we think its competitive advantages are among the best in our coverage, particularly when considering PayPal’s entrenched user base.
Said differently, the market is getting eBay’s valuation wrong, and while we haven’t been happy with the firm’s news flow as of late, shares are a bargain. Our fair value estimate of the firm is close to $90 per share, and we fully expect pricing upside from current levels. The company remains a holding in the Best Ideas portfolio (it does not pay a dividend). eBay’s landing page can be accessed here.
What is considered a ‘Best Idea’ at Valuentum?
A best idea in Valuentum parlance is a holding in the Best Ideas portfolio and/or the Dividend Growth portfolio. We typically add shares to the Best Ideas portfolio when they register a high rating (a 9 or 10 = a “we’d consider buying” rating) on the Valuentum Buying Index and hold them until they register a low rating (a 1 or 2 = a “we’d consider selling” rating) on the Valuentum Buying Index. We don’t add all firms that register a high score on the Valuentum Buying Index to the actively-managed portfolios due to sector weighting or overall market valuation considerations, among others. The Valuentum Dividend Cushion is a key factor behind adding companies to the Dividend Growth portfolio and is used in conjunction with a company’s annual dividend yield, its price-to-fair value ratio and Valuentum Buying Index rating.