Should You Make a Bid for eBay?

The price keeps rising at eBay Inc (NASDAQ:EBAY): about $30 at the beginning of 2012, above $35 at the end of Q1, above $40 at the end of Q2, and currently at about $47 (a 51% gain year to date). The $61 billion market cap company, best known for its auction website but also owning notable services such as Paypal, is increasingly attracting investors as it continues to grow its business. It ranked as one of the ten most popular services stocks among hedge funds (see our full ranking) as 59 funds and other notable investors in our 13F database reported a position in the stock at the end of June (up from 56 for the first quarter).

LONE PINE CAPITAL

One of these funds owning shares of eBay Inc at the end of June was Lone Pine Capital, which initiated a position of 13.9 million shares; this made it the largest hedge fund holder of the stock according to our 13F database. Lone Pine is managed by billionaire Tiger Cub Stephen Mandel and has about $17 billion under management (see more stock picks from Lone Pine Capital). Generation Investment Management, run by David Blood and Al Gore, cut its stake but still owned 6 million shares at the end of the second quarter. It is still one of the five largest positions in the fund’s 13F portfolio (find more of Generation’s favorite stocks).

Revenues in the second quarter of 2012 were up 23% at eBay Inc over the second quarter last year, and net income came in at $692 million compared to $283 million. Over the first half of the year the company saw its revenue rise 26% and its net income pop 66%. Both of eBay’s primary business segments- marketplaces and payments- experienced growth with payments showing a particularly intriguing pop in operating income. Growth was higher in the U.S. than in international markets, and if this trend continues the company could soon see most of its revenue coming from the U.S. (international revenue was 53% of total sales in Q2).

eBay’s trailing and forward P/E multiples come out the same, at 17x. Given the company’s growth this could end up being somewhat low; “growth at a reasonable price” seems like a pretty accurate characterization of the stock. Wall Street analysts are only moderately optimistic, expecting an average of 13% annual EPS growth over the next five years. We certainly don’t think that eBay will be able to continue the growth rate that it showed last quarter, but it seems that the sell-side is setting pretty conservative targets.

On the online marketplace front, eBay can be compared to Amazon.com, Inc. (NASDAQ:AMZN) and Google Inc (NASDAQ:GOOG). Amazon is a remarkably expensive stock, trading at over 100 times analyst consensus on its earnings for next year. No matter how impressed we are by the company’s operations we can’t consider it a good value investment at its current price. Google is more reasonably priced: it trades at 22 times trailing earnings, but saw strong growth in revenue and earnings last quarter compared to a year ago. It could see more growth going forward as it is well positioned in a number of markets, and the forward P/E is only 15 as Wall Street analysts agree.

Visa Inc (NYSE:V) and Mastercard Inc (NYSE:MA), meanwhile, make for good peers for the payments side of eBay’s business. Their forward earnings multiples are at about the same level as eBay, coming in at 19 and 17 respectively, but as we’ve noted we think that analysts are underrating eBay’s prospects. We would note that the credit card issuers are seeing good growth as well, and their stock prices are up between 35% and 55% over the last year. Still, we think that eBay makes for a better buy than these companies as well as being considerably cheaper than Amazon.

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