Is eBay Still A Buy After Earnings?
Back In September I showed you 4 Reasons To Buy eBay to protect your retirement portfolio…
Today, I answer the question – Is eBay Still A Buy After Earnings?
Here’s a quick recap of why I said you should buy it back in September before we get to today’s article. If you want to read the past article in full, use the link above.
eBay’s 1.1% Dividend
Over the last decade eBay’s paid out a total of $0.56 per share in dividends.
At today’s share count of 780 million shares that’s equal to $436.8 million paid out to shareholders in the last decade.
This may not seem like much but eBay just started paying a dividend in 2019.
And it should continue upping its dividend going forward as well.
Because as of this writing its only paying out 21.9% of its earnings as dividends to shareholders. This means it has plenty of room to increase dividend payouts going forward.
These dividend payments will provide you a solid retirement income in normal times if you take the money out. Or allow you to buy more shares over time if you reinvest the dividends.
Both help you earn higher returns over time and will especially help in any kind of prolonged economic issues like we’re dealing with today.
It can do this because it earns huge profits and cash flows. Which is reason #2 to buy eBay.
eBay Earns High Profits
Over the last decade it earned an average operating income margin of 22.2% per year.
I look for anything above 10% on a consistent basis so eBay surpasses this number.
Because after evaluating thousands of companies over the last 13+ years of my career I estimate fewer than 5% of all companies in the world produce consistent operating profit margins above 10% over long periods of time.
This makes eBay a great operating business.
But it also means the company earns enough money from its operations to continue investing in the business for growth… Without having to issue debt or equity.
Another way to show this is with its free cash flow to sales ratio (FCF/Sales). Over the last decade its 24% per year on average.
I call this the “Cash Machine” metric.
I look for anything above 5% on a consistent basis for the same reasons as I look for high operating profit margins above.
eBay surpasses my thresholds on both important metrics and that makes it an incredibly safe investment.
These profits also allow it to continually reinvest in operations. And to pay you a large and growing dividend as well as I mentioned above.
Its large profits and cash flow and growing dividend payments over time make eBay a safe income play in whatever is to come in the next few months or years.
But these profits also allow another layer of safety because eBay business should be largely protected from negative effects of the coronavirus… Which is reason #3.
The Coronavirus Won’t Harm eBay
People may stop paying their mortgages.
They may stop paying their credit cards.
They may stop paying their vehicle loans.
And they may stop paying their student loans.
Because of the mass unemployment caused economic issues we’re now dealing with; people may stop paying these things if they need to.
And people may stop traveling and doing other entertainment related things outside of their houses…
But they won’t stop buying stuff completely.
And they’ll especially be looking for good deals on things they want and need which will lead them to eBay.
This was illustrated on July 28th 2020 when eBay released its 2nd quarter financial results.
- Revenue was up 18% from $2.4 billion in the 2nd quarter of 2019 to $2.9 billion in the 2nd quarter of 2020.
- Earnings per share was up 125%% from $0.46 per share in the 2nd quarter of 2019 to $1.04 per share in the 2nd quarter of 2020.
Why did its revenue and earning per share rise so much?
Because people worldwide have now largely been confined to their houses for the better part of 5 months due to the coronavirus.
And one of the best ways to spend money on things and to find good deals is to buy things on eBay.
This gives enormous stability to the company in these highly uncertain times. And it also means you should expect eBay to continue earning enormous profits and cash flows.
But what about its valuation? Is it cheap? This is reason #4 to buy eBay.
eBay Is Cheap
With the markets at or near all-time highs you’d expect a fantastic stock like eBay to be selling at an enormous valuation.
But its not.
As of this writing its P/E is 19.8.
Its P/CF is 12.5.
And its forward P/E is 15.3.
On all three metrics I look to buy investments below 20 to consider them undervalued.
This shows that eBay is currently undervalued.
And in investing terms this means eBay stock does offer you a margin of safety in investing terminology.
When you invest in stocks that are undervalued and have a margin of safety it makes the investment safer. And it also means you should expect to earn higher returns owning its stock in the coming years.
The inverse of this is also true…
When you invest in a stock that is overvalued and without a margin of safety it makes the investment riskier. And it also means you should expect to earn less owning its stock going forward.
With eBay being undervalued it increases the margin of safety and makes investing in its stock less risky right now.… And it also increases the investment returns you should expect to own going forward too.
If you’re looking for a solid, safe, stable, dividend paying, and enormously profitable investment to protect your investment portfolio – consider investing in eBay…
This thesis to buy eBay continued to play out on October 28th 2020 when it released its most up to date quarterly earnings report.
Revenue grew 25% in the year to year quarterly period to $2.6 billion.
Operating income rose 196% in the year to year quarterly period to $621 million.
Earnings per share rose 64% in the year to year quarterly period to $0.85 per share.
And monthly active buyers increased 5% to reach 183 million people globally.
As mentioned in the last article on eBay… I expected results to be great going forward due to the pandemic.
But I didn’t expect them to be this fantastic.
Plus, its still cheap too…
Its P/E is now 14.5.
Its P/CF is 14.6.
And its forward P/E is 12.8.
These continued impressive results, combined with it remaining cheap, makes eBay still a buy today.
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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.