EBay's Mixed Results - Research Proposal Example

 NEW STOCK RECOMMENDATION – EBAY INC Student’s name Institutional Affiliation [Date Submitted] New Stock Recommendation eBay Inc. Introduction eBay Inc., (EBAY), is an American-based e-commerce multinational corporation that operates several online platforms that link buyers to sellers worldwide (Yahoo Finance, 2018). The company began as a sole proprietorship in 3rd September, 1995 before being incorporated in California in May 1996 (eBay Annual Report, 2017). It was not until September 1998 that the firm completed its first initial public offering (IPO) of common stock (eBay Annual Report, 2017). The company is based in San Jose, California and its industry is specialty retail and consumer cyclical sector (eBay Annual Report, 2017). eBay’s products eBay Inc., manages an online platform portfolio that is composed of its online marketplace named ebay.com that links buyers to sellers, StubHub that manages its online ticketing platform named stubhub.com (Yahoo Finance, 2018). The portfolio also contains mobile apps such as the eBay mobile application for specialty retail function and the StubHub mobile application that connects fans with their favorite shows, artists, and sports (Yahoo Finance, 2018). Apart from the online market place and mobile apps, the company runs a classifieds platform that is composed of a collection of brands such as Gumtree and mobile.de that enable consumers to find the items that they are looking for to satisfy their needs (Yahoo Finance, 2018). Through its online platforms, users are able to find, buy or sell, and even pay for the various items through both online and offline channels that is composed of distributors, retailers, import and export firms, search engines, and networks (Yahoo Finance, 2018). Competitor Analysis eBay’s main competitors are Amazon and Alibaba. It is worth noting that even though the eBay Inc., Amazon, and Alibaba operate within the same industrial sector, their financial performances vary. For instance, Amazon is the largest in terms of market capitalization which stands at $800.369 billion, followed by Alibaba at $367.323 billion, and finally eBay at $27.883 billion (Yahoo Finance, 2018). In terms of revenue generated, Alibaba leads the pack with $250.3 billion followed by Amazon at $177.87 billion, and finally eBay at $9.57 billion (Yahoo Finance, 2018). In terms of the net profit margin, it is worth noting that eBay had a net loss of (1.016) billion as at the end of financial year 2017 and its net profit margin was -8.12%. On the other hand, Amazon had a net profit margin of 1.71% while Alibaba had 25.57%. eBay Inc., Amazon, and Alibaba have different product portfolios. For instance, eBay’s product portfolio is made up of an onlinr marketplace named ebay.com and mobile applications such as Ebay and StubHub. Amazon’s product portfolio is made up of three main platforms namely Amazon.com (retail), Amazon Web Services that offers cloud solutions, and Amazon Prime that offers convenient shipping solutions. Amazon’s product offerings also include digital services, studios, books, and digital content (Amazon Annual Report, 2017). On the other hand, Alibaba’s product portfolio is composed of retail, mobile commerce and electronic commerce, online auction, and online money transfer services (Alibaba Annual Report, 2018). It can be seen that eBay’s competitors have more product offerings and this is one of the chief reasons as to why eBay ranks behind them. eBay’s fundamentals eBay’s current market capitalization stand at $27.883 billion. The open price as at the day of analysis was $29.58 while the previous close price was at $29.63. The bid price on the day of analysis was at $28.40 x 4000 while the ask price was at $28.95 x 1000. The firms current beta is at 1.41. (Source: Yahoo Finance). eBay’s Current Financial Status The decision made when recommending whether eBay’s shares should be bought, held, or sold is dependent on various ratios that are used to determine the firm’s current financial status. The fundamental financial ratios that guide investors in determining whether to buy, hold, or sell eBay’s stock include but are not limited to the firm’s price-to-earnings-ratio, the enterprise’s multiple ratio, enterprise value-to-revenue multiple ratio, and the expected-price-to-earnings-growth ratio. Other essential parameters that are important in determining the investment decision include an analysis of the company’s growth in revenue and the price-to-book value ratio. Each of the ratios stated above shall be discussed below. Current Price-to-Earnings Ratio This ratio is critical in determining whether the stock of the company is overvalued or undervalued. It is calculated as the firm’s price per share divided by its earnings per share (Kennon, 2018). As at the time of analysis, eBay’s price per share was $29.63 while its earnings per share were -$1.01 meaning that eBay’s P/E ratio was -$29.33. In essence, this result shows that eBay is losing money and as a prudent investor, one ought to keep off the stock. Enterprise Multiple Ratio This ratio helps the investors to determine the value of the firm. The reason why this ratio is important to investors is because it takes into consideration the company’s debt, a factor that is not included in most valuation ratios (Investopedia, 2018). Prudent investors are interested in investing in firm’s with little or no debt. Additionally, they are interested in firms that prove they have the ability to settle their obligations on time. The Enterprise Multiple Ratio is calculated as the company’s enterprise value divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA). From the financial information contained in Yahoo Finance website regarding eBay, its enterprise value is $32.94 billion while its EBITDA is $2.98 billion. Therefore, eBay’s Enterprise Multiplier Ratio is 11.05. The decision criterion for this ratio is that a lower ratio may mean that the company is undervalued while a higher ratio may mean that the company is overvalued (Investopedia, 2018). In this case, eBay may be overvalued. Enterprise’s Value-to-Revenue Multiple Ratio This is a measure of the value of a stock of a company that relates the company’s enterprise value to its revenue. In this case, eBay’s enterprise value is $32.94 billion while the revenue as at the time of analysis was $10.22 billion. Hence, the firm’s Enterprise’s Value-to-Revenue Multiple Ratio is 3.22. The higher the ratio, the costlier the company and if the ratio is low, then the company may be a good investment. In this case, eBay is a good investment opportunity. Expected Price-to-Earnings-Growth Ratio Investors are also interested in the relationship that exists between the price of a stock, the firm’s Earnings Per Share (EPS), and the company’s expected growth. This relationship is determined through the calculation of the expected price-to-earnings-growth ratio calculated as the price/earnings divided by the annual earnings-per-share growth. According to Lund (2018), the decision criterion when using this ratio is that if the price-earnings growth (PEG) ratio is low it means that the stock is performing well and if the ratio is high, then the stock is performing poorly. A look into the data about eBay’s valuation measures reveals that its expected PEG ratio is 1.09 meaning that the company is likely to perform well in the coming years. Revenue Growth According to Amadeo (2018), the revenue growth metric is critical in determining the growth of the company because it gets rid of the fluctuations that arise out of the firm’s seasonal changes. In this regard, the investors will be interested in determining how the growth in sales has an impact on the profit that is generated by the firm. eBay’s revenue grew from $8.592 billion in 2015 to $8.979 billion in 2016 to $9.567 billion in 2017 (Yahoo Finance, 2018). This growth in revenue presented a year-to-year rise of 4.5% between 2015 and 2016, and 6.5% between 2016 and 2017. Hence, the revenues are expected to grow by 5.5 in the coming financial year [calculated as (4.5% + 6.5%) / 2)]. Price-to-Book-Value Ratio According to Graham and Dodd (2008), this ratio concerns itself with determining how the value of a particular stock that investors are interested in is perceived by the market. This ratio is determined as the market price per share (MPS) divided by the book value per share (BVS). The decision criterion is such that a PBV ratio of less than one means that the company is performing below expectations. In this regard, eBay’s PBV ratio on the day of analysis stood at 3.955 (YCharts, 2018). Recommendation It is evident from the company analysis based on the ratios stated above that eBay is displaying mixed results. For instance, its net profit margin was a negative. The firm’s price/earnings ratio was also negative. However, both the enterprise multiple ratio and the enterprise value-to-revenue multiple ratio were positive. The enterprise multiple ratio revealed that the firm was overvalued while the enterprise value-to-revenue multiple ratio revealed that the firm provided investors with a viable investing opportunity. The expected PEG ratio revealed that the company is likely to do well in the coming financial years. The year-to-year revenue growth ratio was also on an upward trend. Nevertheless, the firm’s PBV ratio was above one meaning that the company was doing well. In this case, the recommendation would be a buy for prospective investors and for current investors it would be prudent that they hold on to their shares. References Amadeo, K. (2018, June 25). How to Calculate the Year-Over-Year Growth Rate. Retrieved October 9, 2018, from https://www.thebalance.com/year-over-year-yoy-growth-calculation-definition-3305970 AMZN : Summary for Amazon.com, Inc. (2018, November 14). Retrieved November 14, 2018, from https://finance.yahoo.com/quote/AMZN?p=AMZN&.tsrc=fin-srch BABA : Summary for Alibaba Group Holding Limited A. (2018, November 14). Retrieved November 14, 2018, from https://finance.yahoo.com/quote/BABA?p=BABA&.tsrc=fin-srch EBay Inc Price to Book Value:. (2018, November 14). Retrieved November 14, 2018, from https://ycharts.com/companies/EBAY/price_to_book_value Enterprise Multiple (2018, October 18). Retrieved November 14, 2018, from https://www.investopedia.com/terms/e/ev-ebitda.asp Enterprise-Value-To-Revenue Multiple - EV/R. (2018, July 19). Retrieved November 14, 2018, from https://www.investopedia.com/terms/e/ev-revenue-multiple.asp Graham, B., & Dodd, D. (2008). Security Analysis: Foreword by Warren Buffett. McGraw-Hill Professional. Kennon, J. (2018, November 06). Using the P/E Ratio to Value a Stock. Retrieved November 14, 2018, from https://www.thebalance.com/using-price-to-earnings-356427 Lund, B. (2018, June 10). PEG Ratio: A Key Metric of Fundamental Analysis. Retrieved October 10, 2018, from https://www.thebalance.com/fundamental-analysis-understanding-the-peg-ratio-3140796 Read More