High Valuations and Inflation: Why eBay Might Be My Favorite Stock Right Now

E-Trade pioneer eBay (NASDAQ:EBAY) is one of the most underrated investment opportunities on the market today. Not only is it good value for money, but it also provides a buffer against macroeconomic issues.

Additionally, eBay sits on a massive $8 billion investment portfolio that is often overlooked by investors sifting through stock market metrics, which means eBay shares are worth even better than it looks. appears at first glance.

Why eBay is a Great Value Stock

eBay had its initial public offering (IPO) in 1998, meaning it was one of the few early internet companies to survive the dotcom bubble. And he survived for good reason. The company has done well in generating net profits for more than two decades, as shown in the chart below.

EBAY Net Income Data (TTM) by YCharts

Over 20 years of net profit and high operating margin provide assurance that this company will continue to be a profitable business in the future. And right now, you can buy eBay stock at a relatively attractive valuation.

According to Yardeni Research, the average price-to-earnings (P/E) ratio for S&P500 is 22.1, well above its historical average of 15.5. With eBay, a bit of context is needed before revealing its P/E as the company got a $13 billion boost in 2021 from the sale of some non-core assets. This increase temporarily inflates his net income and artificially reduces his P/E ratio to an absurd value of only 3.

For this reason, it may be best to consider eBay’s cash from operations (what the company itself produced), which was just over $3 billion in 2021. Considering that it has a market capitalization of nearly $34 billion at the time of this writing, eBay shares are trading at a paltry 11 times its operating cash flow, well below the current average P/E valuation and history of the S&P 500.

Going back to that $13 billion increase, eBay management used it to reward shareholders. In 2021, it repurchased $7 billion worth of stock, reducing the total number of shares outstanding and increasing shareholders’ slice of the pie.

Right now eBay is sitting on $8 billion Continued in long-term investments in e-commerce companies like Adevinta and fintech companies like Adyen. Management could simply continue to hold these positions and let them go up in value – not a bad option. Or he could choose to sell them as well, which would provide him with another pile of cash to reward shareholders.

eBay management also rewards shareholders through a dividend. Its yield is now low at 1.6%. However, he only paid out $466 million in 2021, a small percentage of his overall earnings. Dividend payouts are steadily increasing and there is plenty of room to continue to do so.

A person in a house surrounded by shipping boxes is holding a tablet and talking on the phone.

Image source: Getty Images.

Why eBay offers inflation protection

Have you ever wondered why gas station prices go up instantly when the price of crude oil rises? This is because operators must sell their current gas supply at a high enough price to replace it.

Inflation is problematic for capital-intensive companies. Profits today may not adequately cover future expenses. And with inflation at its highest level in 40 years, I don’t think this is a macro issue that investors can ignore. That’s another reason to love eBay right now.

eBay is a marketplace business that simply connects buyers and sellers – it doesn’t contain inventory. eBay is therefore somewhat insulated from inflationary risks. Moreover, it can actually advantage of inflation. As product prices increase, eBay processes a higher volume of sales, which allows its revenue to increase because its transaction fees are a percentage of the cost of the transaction. If the cost increases, the fees also increase.

And speaking of high gas prices, consumers are likely to tighten their belts over the coming months as they grapple with rising prices. This could also be to eBay’s advantage due to its reputation for bargains. History favors this perspective. The Great Recession in the United States took place in 2008 and 2009, and eBay grew its revenue by 11% and 2% respectively during those years, despite the decline in consumer spending in general.

Don’t sleep on eBay’s growth potential

Below-average valuations are usually attributed to dying companies with zero growth prospects. This does not describe eBay. Management expects revenue growth of 0% to 3% year over year in 2022, 5% to 6% in 2023 and 7% to 8% in 2024. high growth, eBay is far from dead.

eBay’s new initiatives are expected to drive this growth. Ad revenue is expected to double by 2025, and payment processing revenue also supplements revenue. And those revenue streams also come with improved profit margins.

The stock market has been volatile lately. If you’re looking to get off the roller coaster, consider eBay. Its valuation is very cheap, its management rewards shareholders and it is prepared for whatever is to come. That sums up why eBay is one of my favorite stocks to buy right now.

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Jon Quast has no position in any of the stocks mentioned. The Motley Fool recommends Adyen, Adyen NV and eBay and recommends the following options: Short Calls April 2022 at $62.50 on eBay. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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