Thursday, January 22, 2015

EBAY Stock Looks Good for the Long Term


eBay Inc remains a solid pick for long-term tech portfolios


E-commerce giant eBay Inc (NASDAQ:EBAY) is enjoying a stock rally, a day after it reported fourth-quarter revenue that detailed modest quarter-over-quarter and year-over-year growth.

EBAY stock was up more than 4% on Thursday, as Wall Street seemed undeterred by an earnings report that showed that company growth has steadily declined, and was shadowed by plans to spin off PayPal later in the year, forcing eBay to cut 2,400 jobs this quarter.

Also weighing on the minds of analysts and investors was eBay’s announcement that it is considering the sale or spin-off of its Enterprise division.

Q4 Results


Fourth-quarter revenue was $4.9 billion, up 9% from a year ago. Earnings per share was 90 cents, up 10% over the 81 cents earned in the same period last year. Free cash flow was $1.3 billion, down 11% from 2013. PayPal’s net total payment volume increased 24%, and the division recorded 4.6 million new accounts.

Marketplaces’ gross merchandise volume was $21.8 billion, up 2% over last year. Finally, Enterprise’s gross merchandise sales were $1.9 billion, up 9% year over year.

EBAY’s effective tax rate for the fourth quarter was 18.7%, down from 19.7% a year ago. Total cash and cash equivalents came in at $14.6 billion, up from $12.8 billion at the same point in 2013. The company repurchased $1.2 billion worth of its stock during the quarter, a sizable increase over the $254 million worth of shares repurchased in the fourth quarter of 2013.

2015 Guidance


Revenue for the first quarter is expected to be in the range of $4.35 billion-$4.45 billion. EPS should be between 37 cents and 43 cents. Revenue guidance for full-year 2015 is a range of $18.6 billion to $19.1 billion, or 4%-7% over the $18 billion reported for 2014 as a whole.

Management expects EPS between $3.05-$3.15, or 3%-7% over last year. Free cash flow, however, is expected to be less than $4 billion, compared to the $4.4 billion reported for 2014.

Upcoming Major Events


Management touched again on the previously-announced spin-off of PayPal, which is scheduled to take place in the second half of the year. Originally, eBay CEO John Donahoe resisted pressure from Carl Icahn to spin off his company’s payment processing division, but ultimately Donahoe caved to the relentless activist investor. The costs of separating PayPal from eBay and implementing the changes proposed by Icahn are estimated to range from $210 million to $240 million during the first quarter and $350 million to $400 million for the full year.

In anticipation of the PayPal spin-off later in the year, and to maintain the decreased expenses reported yesterday, eBay announced that 2,400 jobs will be cut in the first quarter of 2015. This figure represents approximately 7% of the company’s total employee base. Cuts will be spread across all divisions including PayPal, Marketplaces, and Enterprise.

Regarding eBay Enterprise, management stated that the business “has limited synergies” with PayPal and Marketplace, and a separation would allow all three entities to function more efficiently by focusing exclusively on their core markets. The Enterprise division, which serves as a comprehensive omnichannel support system for merchants and retailers with brick-and-mortar locations, generated $443 million in revenue during the fourth quarter and added more than 1,000 new customers throughout 2014.

Bottom Line


Despite the fact that eBay stock hasn’t performed well in the short term before today’s rally (the share price was essentially flat over the past year), the company’s fundamentals as of yesterday’s fourth-quarter report appear solid; revenue, EPS, and free cash flow have all increased over 2014.

Plus, considering management’s recent authorization of an additional $2 billion for stock buybacks, combined with the remaining $1 billion from last year’s repurchase program, eBay stock appears to be a good long-term addition to tech-centric portfolios.

However, eBay’s true value and potential as a long-term pick will be easier to determine later in the year, once the PayPal spin-off is complete, as the payment processing division accounted for 43.8% of the company’s total revenue for the fourth quarter.

If management also divests the Enterprise division, leaving only the Marketplace, the company’s ability to successfully operate as an online auction site will be clear.

Article originally appeared on InvestorPlace.com (01/22/2015)