The Best Way to Play the Current Tech Rally Is eBay Stock
Covid-19 has brought investors back to eBay stock, and now the company is sitting pretty
eBay (NASDAQ:EBAY) stock is an interesting one to analyze. Founded in 1995, the multinational e-commerce company was one of several success stories that came out of the dot-com bubble. Since that time, it has seldom dominated headlines like Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT). But that doesn’t mean it’s not worth your attention.
Still, the lack of headlines is understandable. In comparison to these giants, eBay has simply meandered along at its own pace. It has been a steady stock, but one that has not elicited a lot of excitement for several years. But that has changed in recent months.
Over the last six months, eBay stock is up 22%. In comparison, the S&P 500 is down close to 5% in the same period. That’s great news if you are an eBay stockholder. More importantly, there is no danger of the stock losing steam anytime soon.
The novel coronavirus is shining a new light on the company’s operations and its business structure. As people tend to avoid gatherings and stay indoors, they will naturally gravitate toward e-commerce platforms that will allow them to buy and sell goods with ease.
With renewed interest in its business and activist investors pushing it in the right direction, eBay stock will continue to climb.
Starboard Wars
Activist Starboard Value and eBay recently settled their differences, bringing to an end a lengthy series of battles between the two parties. Starboard first purchased a stake in eBay in 2018, and from that time on, it has been trying to influence how things run.
The firm started to flex its muscles through two director appointments and was also instrumental in eBay initiating a dividend.
However, it seemed that these changes were not enough. Starboard presented a new list of demands that included four new director appointments in February. eBay did not take kindly to these suggestions, and shareholders were nervous regarding what the conflict meant for their fortunes.
Just when it seemed that things were going to go sour, eBay and Starboard came to a settlement. Starboard withdrew its proposals. In exchange, eBay supported Jamie Iannone as its new CEO.
Investors likely breathed a sigh of relief after the resolution. And they are likely looking forward to eBay management and Starboard working together to increase shareholder value. It’s fair to say Starboard has been instrumental in ensuring non-essential businesses get sold to shore up the balance sheet. So, even if it’s tough love, one can argue that eBay needs it at this stage.
StubHub Sale Will Help eBay Stock
StubHub is a platform that helps connect buyers and sellers for live event tickets. Considering how Covid-19 has massively impacted sporting and entertainment events, you can guess that the business is a risky proposition at this point.
That’s why it was excellent timing when eBay sold the platform in February. A few months here or there, and perhaps the platform would not have found a buyer.
eBay purchased the platform for $310 million in 2007 and sold it for $4.05 billion to Viagogo. Not a bad deal, I would say, considering the Covid-19 situation. The lion’s share of proceeds from the sale will go toward repurchasing stock, a strategy the company is pursing quite aggressively in recent quarters.
eBay has pursued an aggressive share buyback strategy recently, repurchasing $1 billion worth of stock every quarter for the past two years. In a press release for the StubHub sale, eBay said it was revising its stock repurchase plans for the year.
The company will now purchase $4.5 billion in shares in the year. That translates to a buyback yield of 14.7%. eBay also pays an annual dividend of 64 cents per share, translating to a yield of 1.5%. So that’s 16.2% the company is returning right there to shareholders.
Covid-19 Has Put the Spotlight Back on eBay
It’s important to note here that renewed interest in eBay stock is because of Covid-19. More than ever, people are purchasing goods and services online, pushing valuations higher and higher for e-commerce platforms like Amazon and Alibaba (NYSE:BABA). eBay is also experiencing higher traction as a result.
What’s more exciting for eBay is that it offers a resale platform that is unique to the company. In the current environment, many people who are cash strapped want to get rid of excess baggage from their homes and make some money at the same time. That’s where eBay comes in. And considering that we don’t know when this crisis will end, you can safely assume that volumes and margins for eBay will be quite healthy, at least for the next couple of years.
These could be the reasons why eBay does not believe the pandemic will have a massive impact on operational performance. Guidance for 2020 shows that revenue of $9.6 billion is in the cards, and the company is set to produce $2.2 billion in free cash flow.
That’s not bad, considering the shape of the U.S. economy at the moment.
Keep an Eye on the Classifieds Business
Oh, there’s one last thing. In March 2019, eBay conducted a strategic review which looked at the company’s classified ads business and StubHub. Eventually, as I discussed earlier, the company sold StubHub earlier this year.
But Starboard was not satisfied, and wanted the company to take further action. eBay subsequently reached out to several candidates for its classifieds business, with the hopes of fetching roughly $10 billion. Assuming the sale goes down, look for a dramatic upswing in the core metrics of the company.
My Takeaway on eBay Stock
eBay stock offers long-term value and significant upside at its current trading price. Tech stocks are leading the recovery, offering a clear sign of where things are headed. But eBay’s larger peers like Amazon and Microsoft are expensive, and eBay offers an attractive entry point for investors looking to increase exposure to the e-commerce space.
Conservatively, I believe the stock will trade close to $50 a pop in a year, as the broader markets mount a recovery. If it can get that deal for the classifieds business through, expect valuations to skyrocket.
eBay stock is a buy for me.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. He has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio. Faizan does not directly own the securities mentioned above.