EBAY INC.
NASDAQ: EBAY
Sector: Services
Industry: Retail (Specialty)
FUNCTION:
eBay Inc. operates a marketplace in which anyone, anywhere, can buy or sell practically
anything. The Company has developed a Web-based marketplace in which a community of
buyers and sellers are brought together to browse, buy and sell various items. Through its PayPal
service, eBay enables any business or consumer with e-mail to send and receive online payments
securely, conveniently and cost-effectively. The Company's marketplace exists as an online
trading platform that enables a global community of buyers and sellers to interact and trade with
one another. Its platform is a fully automated, topically arranged, intuitive and easy-to-use online
service that is available 24 hours a day, seven days a week (subject to a weekly scheduled twohour maintenance period), enabling sellers to list items for sale in either auction or fixed-price
formats, buyers to bid for and/or purchase items of interest and all eBay users to browse through
listed items from any place in the world at any time. For the 9 months ended 9/30/03, revenues
rose 90% to $1.52B. Net income rose 87% to $304.7M. Results reflect increased online
transaction activity and the PayPal acquisition, partially offset by litigation and amortization
costs.
FINANCIAL SNAPSHOT:
Sales/Revenue: $1,930,631,000 (TTM)
Market Capitalization: $33,494,352,000
Industry Rank: Number 30 (Sales/Revenue)
Number 1 (Market Capitalization)
1
Fundamental Analysis:
A- Equity Valuation
Ratio
DDM
P/E
(TTM)
Company
Not Applicable1
92.60x
Industry
Sector
Market
Comparison
39.88x
27.54x
25.61x
PEG
(TTM)
1.12x
0.99x
1.28x
1.17x
PSR
(TTM)
18.76x
4.71x
2.71x
3.39x
P/B
(MRQ)
Beta
7.83x
5.80x
3.87x
4.35x
2.62
1.50
1.02
1.00
P/Eco>P/EInd and P/ESec
EBay’s P/E Ratio is much
higher than the industry and
the sector indicating that the
stock is significantly
overvalued.
PEG co> PEGInd , but PEG co <
PEGSec . EBay’s stock is fairly
valued.
PRSco > PSRInd and PSRSec
EBay’s PSR is more than 3,
indicating the stock is highly
overvalued.
PBco>1 which indicates that
the stock is overvalued.
Betaco >1. This stock is more
volatile and riskier than stocks
in this industry and sector.
Conclusion of Equity Valuations:
EBay’s P/E, PSR and P/B of 92.60, 18.76, and 7.83 respectively are much higher compared to
the averages of its industry and sector. Therefore, eBay’s stock is considered significantly
overvalued compared to stocks in its industry and sector. EBay’s stock is also considered riskier
than those in its industry and sector because eBay’s stock Beta of 2.52 is higher than the average
Beta of its industry and sector.
1
The DDM cannot be calculated because eBay has not paid out any dividends.
2
B-Financial Strength Analysis
Category
1GROWTH
RATE
Ratio
5 years
Growth of
Sales
Company
96.57%
Industry
40.43%
Sector
18.79%
Market
9.74%
5 years
Growth of
EPS
82.66%
36.41%
17.09%
10.42%
Comparison
The sales growth
of eBay is
substantially much
higher compared
to the industry and
sector averages.
The EPS growth of
eBay is
substantially much
higher compared
to the industry and
sector averages.
Growth of Sales
5 Year Sales Growth
3 Year Trend Analysis
400.0%
300.0%
EBay
200.0%
Industry
100.0%
0.0%
2000
2001
2002
Year
Interpretation
Although eBay’s 5 year sales growth was higher than its industry average in 2002, the 3 year
trend analysis shows that eBay’s 5 year sales growth is on a downward trend.
3
Growth of Earnings Per Share
5 Year Growth of EPS
3 Year Trend Analysis
200.0%
150.0%
EBay
100.0%
Industry
50.0%
0.0%
2000
2001
2002
Year
Interpretation
This chart shows that eBay’s 5 year EPS growth is significantly higher than its industry average.
However, its 5 year EPS growth from year 2001 to 2002 was stagnant.
Category
Ratio
Company
2Operating 27.96%
PROFITABILITY Margin
Net Profit
Margin
20.68%
Industry
10.72%
Sector
12.76%
Market
18.81%
6.70%
7.20%
11.73%
Comparison
The Operating
Profit margin of
eBay is
substantially much
higher than the
industry and sector
averages.
The Net Profit
margin of eBay is
substantially much
higher than the
industry and sector
averages.
4
Operating Margin
Operating Margin
3 Year Trend Analysis
40.0%
30.0%
EBay
20.0%
Industry
10.0%
0.0%
2000
2001
2002
Year
Interpretation
EBay’s operating margin increased tremendously from year 2000 to 2002. Its operating margin
was almost triple its industry average in 2002.
Net Profit Margin
Net Margin
3 Year Trend Analysis
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
EBay
Industry
2000
2001
2002
Year
Interpretation
After experiencing very little net margin growth from year 2000 to 2001, eBay’s net margin
showed a significant improvement in 2002.
5
Category
Ratio
3ROI
MANAGEMENT
EFFECTIVENESS
ROE
Company
10.43%
Industry
10.58%
Sector
8.04%
Market
9.65%
10.74%
17.53%
15.04%
18.00%
Comparison
The return on
investment of
eBay is relative to
its industry
average but
slightly higher
than its sector
average.
The return on
equity of eBay is
lower than the
industry and
sector averages.
Return on Equity
3 Year Trend Analysis
ROE
20.0%
15.0%
EBay
10.0%
Industry
5.0%
0.0%
2000
2001
2002
Year
Interpretation
Although eBay’s ROE is lower than its industry average, this chart shows that eBay’s ROE has
been on a steadily upward trend from year 2000 to 2002.
6
Category
Ratio
Company Industry
34.54x
4Receivable 9.16x
EFFICIENCY Turnover
RATIO
Asset
Turnover
0.45x
2.02x
Sector
18.13x
Market
10.10x
1.18x
0.93x
Comparison
The receivable turnover
of eBay is considerably
much lower than the
industry and sector
averages. This indicates
that eBay collects its
receivables much slower
compared to those in its
industry and sector.
The asset turnover of
eBay is lower than the
industry and sector
averages. This indicates
that eBay does not utilize
its assets as well as those
in its industry and sector.
Receivable Turnover
Receivable Turnover
3 Year Trend Analysis
40.0
30.0
EBay
20.0
Industry
10.0
0.0
2000
2001
2002
Year
Interpretation
This chart shows that eBay’s receivable turnover is much lower than its industry average.
Referring to the chart above, eBay’s receivable turnover has not improved much from year 2000
to 2002.
7
Asset Turnover
Asset Turnover
3 Year Trend Analysis
2.5
2.0
1.5
1.0
0.5
0.0
EBay
Industry
2000
2001
2002
Year
Interpretation
EBay’s asset turnover is underperforming its industry average. This chart also illustrates that
eBay’s asset turnover was stagnant from year 2000 to 2002.
Category
5DEBT
RATIO
Ratio
Company
0.03x
Total
Debt/Equity
Interest
Coverage
225.48x
Industry
0.66x
Sector
0.88x
Market
0.97x
13.64x
7.17x
12.97x
Comparison
The debt/equity ratio
of eBay is not as
high as the industry
and sector averages.
This indicates that
eBay is not as
leveraged as those in
its industry and
sector.
The interest
coverage ratio of
eBay is significantly
much higher than
the industry and
sector averages. This
indicates that eBay
can meet its fixed
obligations much
better than those in
its industry and
sector.
8
Debt/Equity
Total Debt/Total Equity
3 Year Trend Analysis
0.80
0.60
EBay
0.40
Industry
0.20
0.00
2000
2001
2002
Year
Interpretation
This chart illustrates that eBay’s total debt / total equity is much better than its industry average.
From the chart above, eBay’s total debt / total equity was not only much better than its industry
average in 2002, but it has also slightly improved from year 2000 to 2002.
Category
Ratio
6Quick
LIQUIDITY Ratio
RATIO
Current
Ratio
Company
3.29x
Industry
1.12x
Sector
0.89x
Market
1.27x
3.47x
2.19x
1.49x
1.79x
Comparison
The quick ratio of eBay is
higher than the industry and
sector averages. This indicates
that eBay is more liquid than
those in its industry and
sector.
The current ratio of eBay is
higher than the industry and
sector averages. This indicates
that eBay is more liquid than
those in its industry and
sector.
9
Quick Ratio
Quick Ratio
3 Year Trend Analysis
5.00
4.00
3.00
2.00
1.00
0.00
EBay
Industry
2000
2001
2002
Year
Interpretation
This chart shows that eBay’s quick ratio is much higher than its industry average. However, it
must be noted that eBay’s quick ratio has declined from year 2001 to 2002.
Current Ratio
Current Ratio
3 Year Trend Analysis
6.00
5.00
4.00
3.00
2.00
1.00
0.00
EBay
Industry
2000
2001
2002
Year
Interpretation
This chart shows that eBay’s current ratio is much higher than its industry average. However, it
must be noted that eBay’s current ratio has declined from year 2001 to 2002.
10
Conclusion of Financial Strength Analysis:
EBay has a tremendous financial potential in the areas of profitability and growth. EBay’s 5 year
sales and EPS growth rates of 96.57% and 82.66% respectively are significantly higher than its
industry average of 40.43% and 36.41%. As for eBay’s profitability, its operating margin and
net profit margin of 27.96% and 20.68% are much higher than its industry average of 10.72%
and 6.70%. EBay has proved to be very competitive within its industry and its sector, posting
results that are much higher compared to the industry and sector averages in several areas.
EBay’s low level of debt (total debt/total equity ratio of 0.03x) would enable it to have a
substantial capacity for growth. If eBay can continue to grow in these areas and improve in its
ROE and efficiency ratios, the potential for further growth would be limitless.
11
Technical Analysis:
1- Simple Moving Average:
A Moving Average is an indicator that shows the average value of a security's price over a
period of time. When calculating a moving average, a mathematical analysis of the security's
average value over a predetermined time period is made. As the securities’ price changes, its
average price moves up or down.
There are five popular types of moving averages: simple (also referred to as arithmetic),
exponential, triangular, variable, and weighted. Moving averages can be calculated on any data
series including a security's open, high, low, close, volume, or another indicator. A moving
average of another moving average is also common.
The only significant difference between the various types of moving averages is the weight
assigned to the most recent data. Simple moving averages apply equal weight to the prices.
Exponential and weighted averages apply more weight to recent prices. Triangular averages
apply more weight to prices in the middle of the time period. And variable moving averages
change the weighting based on the volatility of prices.
The most popular method of interpreting a moving average is to compare the relationship
between a moving average of the security's price with the security's price itself. A buy signal is
generated when the security's price rises above its moving average and a sell signal is generated
when the security's price falls below its moving average.
12
Figure 1: eBay (10 Day Price Chart)
Interpretation:
On November 3 and 4, the stock price of eBay has been hovering above the moving average at
the end of one hour intervals, and the moving average has inched upwards for the last two
trading sessions. This has triggered a BUY signal for short term traders.
Figure 2: eBay compared to the S&P 500 index (10 Day Price Chart)
Interpretation:
In comparison with the S&P 500 index, eBay’s stock seems to be heading the opposite direction
for the last two trading sessions. It seems to me that the S&P 500 index has encountered a little
bit of resistance for the last 2 days. Place a BUY on eBay.
13
Figure 3: eBay compared to Amazon.com (10 Day Price Chart)
Interpretation:
The price movements of eBay’s stock in the last ten trading sessions suggests that they tend to
move in tandem with the price movements of Amazon.com stock and vice versa. Based on the
SMA analysis, I will maintain a BUY on eBay.
2- Relative Strength Index:
The Relative Strength Index ("RSI") is a popular oscillator. The name "Relative Strength
Index" is slightly misleading as the RSI does not compare the relative strength of two securities,
but rather the internal strength of a single security. The RSI is a price-following oscillator that
ranges between 0 and 100. A popular method of analyzing the RSI is to look for a divergence in
which the security is making a new high, but the RSI is failing to surpass its previous high. This
divergence is an indication of an impending reversal. When the RSI then turns down and falls
below its most recent trough, it is said to have completed a "failure swing." The failure swing is
considered a confirmation of the impending reversal. Movements above 70 are considered
overbought, while an oversold condition would be a move under 30.
14
Figure 1: eBay (6 Months Price Chart)
Interpretation:
EBay’s RSI is about the 55 level. Though not considered in the overbought or oversold category,
the 50 level is the RSI midpoint value, and will often act as a support during pullbacks and
resistance during bounces. Place a HOLD on eBay.
15
Figure 2: eBay compared to the S&P 500 index (6 Months Price Chart)
Interpretation:
Figure 2 illustrates that EBay’s stock is more volatile compared to the S&P 500 during the
months of July to November. Since eBay’s RSI is close to the 50 level, I would recommend a
HOLD on eBay.
16
Figure 3: eBay compared to Amazon.com (6 Months Price Chart)
Interpretation:
In figure 3, Amazon.com’s stock has outperformed eBay’s stock during the same period.
However, based on the RSI analysis, I would recommend a HOLD on eBay.
17
3-Bollinger Bands:
Bollinger Bands are similar to moving average envelopes. The difference between Bollinger
Bands and envelopes is envelopes are plotted at a fixed percentage above and below a moving
average, whereas Bollinger Bands are plotted at standard deviation levels above and below a
moving average. Since standard deviation is a measure of volatility, the bands are self-adjusting:
widening during volatile markets and contracting during calmer periods.
Bollinger Bands are usually displayed on top of security prices, but they can be displayed on an
indicator. These comments refer to bands displayed on prices.
As with moving average
envelopes, the basic interpretation of Bollinger Bands is that prices tend to stay within the upperand lower-band. The distinctive characteristic of Bollinger Bands is that the spacing between the
bands varies based on the volatility of the prices. During periods of extreme price changes (i.e.,
high volatility), the bands widen to become more forgiving. During periods of stagnant pricing
(i.e., low volatility), the bands narrow to contain prices.
Figure 1: EBay (6 Months Price Chart)
Interpretation:
EBay currently falls within the Bollinger Band. This indicates that the stock is neither positively
nor negatively extended. Since the Bollinger Band widths are quite wide, this indicates that
there is some volatility in the price of the stock. However, since eBay falls within the Bollinger
Band, this indicates a time to HOLD the stock since there is great potential for price growth.
18
Figure 2: EBay compared to the S&P 500 index (6 Months Price Chart)
Interpretation:
EBay seems to be very volatile compared to the S&P 500 index. It is shown that eBay and the
S&P 500 index seem to have quite a similar historical trend. Judging by that, I would only
assume that eBay’s stock price is poised for further appreciation. However, since eBay currently
falls within the Bollinger Band, I would recommend to ACCUMULATE this stock since there
is great potential for price appreciation.
19
Figure 3: EBay compared to Amazon.com (6 Months Price Chart)
Interpretation:
Amazon.com’s stock has outperformed eBay’s stock in the last six months. This suggests there is
a little upside to eBay’s stock. It must be noted that eBay has posted better financial results
compared to Amazon.com. This indicates that it is an opportune time to ACCUMULATE
within the market and HOLD the eBay stock.
20
4- Volume Analysis:
The Cumulative Volume Index ("CVI") is a market momentum indicator that shows whether
money is flowing into or out of the stock market. It is calculated by subtracting the volume of
declining stocks from the volume of advancing stocks, and then adding this value to a running
total.
The CVI and OBV (On Balance Volume) are quite similar. Many computer programs and
investors incorrectly call the OBV the CVI. OBV, like the CVI, was designed to show if volume
is flowing into or out of the market. But, because up-volume and down-volume are not available
for individual stocks, OBV assumes that all volume is up-volume when the stock closes higher
and that all volume is down-volume when the stock closes lower. The CVI does not have to
make this large assumption, because it can use the actual up- and down-volume for the New
York Stock Exchange.
One useful method of interpreting the CVI is to look at its overall trend. The CVI shows whether
there has been more up-volume or down-volume and how long the current volume trend has
been in place. Also, look for divergences that develop between the CVI and a market index. For
example, is the market index making a new high while the CVI fails to reach new highs? If so, it
is probable that the market will correct to confirm the underlying story told by the CVI.
21
Figure 1: eBay (6 Months Price Chart)
Interpretation:
Figure 1 illustrates that EBay’s stock was on the upside at the end of October but this price move
was not supported by heavy volume. Place a HOLD on eBay.
22
Figure 2: eBay compared to the S&P 500 index (6 Months Price Chart)
Interpretation:
The volume index of eBay is not rising in relation to the Market. This indicates that the number
of investors of the stock is decreasing. This verifies that it is not the best time to buy the stock
because the demand for the stock is not strong. Place a HOLD on the stock.
23
Figure 3: eBay compared to Amazon.com (6 Months Price Chart)
Interpretation:
The price movement of eBay’s stock in the last six months suggests that they have
underperformed in relation to Amazon.com’s stock. There seems to be a strong resistance in the
upward momentum of eBay’s stock. Although eBay’s volume has been pretty consistent in the
last 6 months, its stock price has not appreciated much. Unless and until there is a gradual
increase in volume, I would place a HOLD on eBay.
Conclusion of the Technical Analysis:
EBay is a trading play at the moment. If you looking for a longer term investment, eBay is not at
the best price and time to purchase at this time. Although the technical analysis demonstrates
that eBay will somehow encounter some upside market resistance, I will still recommend eBay
for short-term traders.
24
Leading Economic Indicator Analysis
Gross Domestic Product (% change)
8
6
2002
4
2003
2
0
1Q
2Q
3Q
4Q
Interpretation
The US economy expanded at a 7.2% rate in the third quarter of this year. A sustained GDP
growth bodes well for the stock market.
Earnings Growth Rate
30
20
10
0
-10
-20
-30
2001
2002
2003
1Q
2Q
3Q
4Q
Interpretation
The forecast for the stock market in the intermediate term is good because companies have
reported 7 consecutive earnings growth quarters. In third quarter of this year, companies on
average reported a whopping earnings growth rate of 21.8%.
25
Job Growth (in thousands)
200
100
0
-100
J F M A M J J A S O N D
-200
-300
-400
Job
Growth,
2001
Job
Growth,
2002
Job
Growth,
2003
-500
Interpretation
There were huge job losses in the US in 2001 and 2002. Job growth in 2003 is also very poor.
However, there are signs that the job market is slowly improving. Job growth is important for the
economy and subsequently the stock market. With a poor job growth, more people will join the
ranks of the unemployed. Most importantly fewer people are incline to purchase durable and non
durable goods, and instead choose to save their hard earned money due to an uncertain future.
Subsequently, companies will be hurt by the consumers’ actions, and this will be reflected in
their earnings and performance of their respective stock prices.
Consumer Confidence
Consumer
Confidence,
2001
140
120
100
80
60
40
20
0
Consumer
Confidence,
2002
J F M A M J J A S O N D
Consumer
Confidence,
2003
26
Interpretation
Consumer confidence is important to the US economy because it accounts for 70% of all activity
in the $10 trillion economy. Consumer confidence in 2003 is still weak. Based on the graph
above, consumer confidence will likely remain weak unless job growth improves significantly.
2
1.5
1
PPI, 2002 (%
change)
0.5
0
-0.5
J F M A M J J A S O N D
PPI, 2003 (%
change)
-1
-1.5
-2
Interpretation
The PPI for 2001 and 2003 has been very low. Based on the graph above, the PPI is likely to be
in the range of 0 and 1 in the near future.
0.8
0.6
0.4
CPI, 2002 (%
change)
0.2
CPI, 2003 (%
change)
0
-0.2
J F M A M J J A S O N D
-0.4
Interpretation
The CPI for 2002 and 2003 has been very low. It is projected that the CPI will remain low for the
next 6 months. The Federal Reserve will not raise the interest rate if the level of inflation is low.
A higher interest rate will have a negative effect on the stock market.
27
Conclusion of economic indicator analysis:
Based on the six graphs above, the US economy has showed signs of growth but the high
unemployment rate and low consumer confidence is not helping the stock market at all. On the
plus side, companies are slowly but surely seeing earnings and profits improve. Another positive
side is the low inflation rate judging by the PPI and CPI numbers. The US economy as a whole
will improve in the next 12 months but it will experience a rocky ride along the way.
28
Industry Analysis
10 Best Performing Industries
Industry
% Change One Month
Packaging & Containers
14.6%
Sporting Goods Stores
14.4%
Semiconductor Equipment & Materials
14.3%
Textile - Apparel Clothing
13.9%
Processing Systems & Products
13.9%
Diagnostic Substances
13.7%
Jewelry Stores
13.6%
Computer Based Systems
13.1%
Copper
12.5%
Air Services, Other
12.0%
10 Worst Performing Industries
Industry
% Change One Month
Drugs - Generic
-13.1%
Sporting Activities
-13.1%
Drug Delivery
-11.0%
General Entertainment
-7.8%
Long Distance Carriers
-6.7%
REIT - Hotel/Motel
-6.0%
Oil & Gas Equipment & Services
-5.4%
Healthcare Information Services
-5.3%
Grocery Stores
-4.9%
Appliances
-4.7%
Conclusion of industry analysis:
With the general improvement in the economy, the retail (specialty) industry is projected to
greatly benefit from this turnaround in the economy because people will have more disposable
income to spend on goods and services produced by the retail (specialty) industry.
29
RECOMMENDATION:
Based on eBay’s fundamental analysis, it is a STRONG BUY as a long-term investment
because of its potential for further growth and expansion, and its financial strength. The technical
analysis indicates that it is a good time to HOLD the stock at this time, except for punters who
are short- term traders. Final conclusion: “HOLD” on eBay for long-term investors and
“BUY” eBay for trading purposes.
30