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Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does eBay Inc (NASDAQ:EBAY) fit the bill? Let’s look at what its recent results tell us about its potential for future gains.


What we’re looking for
The graphs you’re about to see tell eBay Inc (NASDAQ:EBAY)’s story, and we’ll be grading the quality of that story in several ways:

  • Growth: are profits, margins, and free cash flow all increasing?
  • Valuation: is share price growing in line with earnings per share?
  • Opportunities: is return on equity increasing while debt to equity declines?

What the numbers tell you
Now, let’s take a look at eBay Inc (NASDAQ:EBAY)’s key statistics:

EBAY Total Return Price Chart

EBAY Total Return Price data by YCharts

Passing Criteria 3-Year* Change Grade
Revenue growth > 30% 63.4% Pass
Improving profit margin (31.6%) Fail
Free cash flow growth > Net income growth 44.4% vs. 11.8% Pass
Improving EPS 11.3% Pass
Stock growth (+ 15%) < EPS growth 98.4% vs. 11.3% Fail

Source: YCharts.
*Period begins at end of Q1 2010.

EBAY Return on Equity Chart

EBAY Return on Equity data by YCharts

Passing Criteria 3-Year* Change Grade
Improving return on equity 9.8% Pass
Declining debt to equity 82.4% Fail

Source: YCharts.
*Period begins at end of Q1 2010.

How we got here and where we’re going
eBay Inc (NASDAQ:EBAY) doesn’t quite come through with the flawless performance, as it’s only earned four out of seven possible passing grades. eBay has enjoyed significant growth in revenue, but net income has failed to keep pace, and the company’s net margin has actually declined. eBay has had a tough time keeping its costs down, despite this apparent inadequacy, eBay’s shares have made an impressive comeback, and the stock has quietly become one of Silicon Valley’s best dot-com rebounds. Is this rebound sustainable, or will eBay shareholders fall victim to rising costs in the end

With 112 million active users and more than 350 million listings globally, eBay Inc (NASDAQ:EBAY) certainly qualifies as a world-leading e-commerce company. eBay’s advantage isn’t measured in dollars but in people, and it’s that trust and loyalty that gives eBay a huge moat. The same could be said of, Inc. (NASDAQ:AMZN), but the mechanisms behind each company’s success differ in subtle but critically important ways. The art of negotiation can still be found on eBay (where it hasn’t been replaced with Buy It Now), but Amazon prefers to focus on simple cost comparisons — what you see as the lowest price on Amazon is what you’re going to get. Amazon also lacks the built-in payment mechanism eBay bought years ago and has slowly built into a world-class online payments processor.

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