eBay Goes On Sale After Record Quarter
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eBay Is A Deep-Value For Dividend-Growth Investors
Shares of eBay (NASDAQ: eBay) are plunging in the premarket session because the company gave light guidance. The guidance is calling for 8-10% sequential growth on top of a tough 6.6% comp in the previous quarter and is no weak outlook. The problem for the market is the analysts. The analysts were expecting the Q1 results to be blow-out-fantastic so the 42% YOY gain wasn’t all that exciting. What makes it worse is that guidance for revenue, while above the consensus, is expecting a weaker-than-consensus margin and projecting EPS below target. The takeaway for us is that this high-profile eCommerce leader is growing, cash flow is growing, FCF is growing, it bears the trappings of an attractive dividend grower, and it is wickedly undervalued and cheaper than ever.
eBay Had A Great Q1 But That Was Expected
eBay had a great Q1 period with net revenue of $3.02 billion up 42% from last year and 5.2% sequentially. The net beat the consensus by $0.05 billion or about 179 basis points but that’s not a large margin in light of recent trends. The gains were driven by a 29% gain in gross merchandise volume which topped $27 billion and beat the consensus by 450 basis points. The company’s annual active buyers increased by 7.0% and sellers by 8.0% which suggests to us the revenue gains are sticky.
Moving down, both the operating and adjusted operating margins were strong at 27.9% and 33% respectively, up triple digits from last year, and drove solid cash flow and FCF gains. Operating cash flow came in at $938 million while FCF rose to $855 million or about 91% of the net. The bottom line results are equally strong and equally mixed in regards to expectations. The GAAP $0.82 is up 29% from last year but missed its target by $0.04 while the $1.09 in adjusted earnings is up 41.5% and beat by $0.02.
eBay Provides Deep Value And Yield
eBay has only been paying a dividend for three years but it looks like it could keep paying and increasing the distribution for years to come. Not only has the company chosen to increase the payout annually since its inception but the payout ratio is very low at 16% and the FCF is very high. Based on the balance sheet and the payout history, we think investors should expect eBay to maintain a double-digit dividend CAGR in the 10% to 15% range. There is some debt on the books to be aware of but it’s very manageable and balanced out by a high cash position, low leverage, and ample coverage.
As for the value, eBay is only trading about 15X this year’s consensus estimate and 14X next year which we think wrong for two reasons. The first is that the analysts are underestimated eBay’s earnings in 2021. By our calculations, this stock is trading closer to 10X 2021 earnings than 15X. The second reason is that we think the market is miss-valuing this stock. eBay is an established eCommerce retailer with strong cash flows, high margins, a strong balance sheet, and pays a nice dividend. The yield is a bit small at 1.1% but we think that could change too. Competitors Etsy and Wayfair are trading at 64X and 118X their earnings when neither pays a dividend and eCommerce-winner Williams Sonoma is trading at 18X EPS with only a slightly larger dividend. Any way you slice it this stock is a value.
The Technical Outlook: eBay Is Near Rock-Bottom Pricing
Shares of eBay plunged nearly 9.0% in premarket trading and may head lower before it heads higher. The caveat is that price action is already trading in a range where strong support might be found so the bottom may be closer than it looks. The support range is coincident with a head&shoulders reversal pattern that formed earlier in the year. If the price action doesn’t hold up at the $57 level we think it could fall as far as $52 before reversing. If price action is able to hold up at the $57 level eBay will likely begin trading in a range with $64 as the top for the next few months.
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