To a lot of us eBay (NASDAQ: EBAY) sounds like a relic or an answer to a trivia question. After all it has been 15 years since Americans that are not comic book collectors, or antique sellers have thought about the auction website.
Many investors turned their backs upon it when PayPal Holdings (NASDAQ: PYPL) got spun off last year. Despite all that eBay has survived and continued to make money. Some of the recent financial numbers released on October 19, indicate that it might even be growing.
Naturally this piques the interest of value investors, if eBay is an unfashionable company that makes money; it meets some classic Ben Graham criteria for a value bargain. That means we will need to ask the all-important question here: is eBay making money?
Is eBay making Money?
Yes folks; eBay is making these days despite the lack of PayPal it reported a net income of $1.807 billion on September 30, 2016. That income is down from the $2.271 billion the auction site reported in September 2015, but it is still very impressive given the fact that eBay reported revenues of $8.906 billion at the end of third quarter 2016.
Beyond that the other numbers eBay has quite a bit of float for a company its size. It reported a profit margin of 18.63% and a free cash flow of $617 million at the end of September.
More impressively it reported cash and short-term investments of $8.045 billion on September 30, 2016; indicating a very cash-rich company that is in a good position for growth or acquisition. Beyond that eBay also reported assets of $20.5 billion and generating $3.246 billion in cash from operations.
My contention is that all this cash makes eBay a value investment. In fact it looks cash rich enough to be Berkshire Hathaway (NYSE: BRK.A) acquisition.
Why eBay has a lot of Float and Cash
Many people will be wondering why eBay has so much as and float. My guess is that money comes from all of the auction and listing fees it charges.
If you want to sell on eBay you have to pay for the privilege. I had to shut down my eBay store awhile back because I could not afford the charges for it. That’s different from Amazon (NASDAQ: AMZN); which gives you unlimited free listings and makes money only when merchants sell.
EBay makes money when merchants sell and when they list. The platform is not sexy or conductive to volume selling but it is immensely profitable.
Currently, eBay is the only place where you can sell a lot of collectibles and used items – such as old DVDs online. That gives it a huge captive market and a large pool of potential revenue. It also generates a lot of float, which makes eBay a value investment.
Why eBay is a Good Income Investment even though it pays no Dividend
Despite all that eBay is not a great investment because it pays no dividend and has no dividend history. Don’t worry folks I checked NASDAQ and this is quite true.
That means the only way to make money from eBay is from the share value growth which is quite impressive. Ycharts reported that EBAY shares delivered a 27.67% return on equity for the third quarter of 2016.
Even though there’s no dividend, eBay is still a good value and income investment because of the return on equity and low stock price; $28.99 a share on October 25, 2016. We must remember that eBay is in very good company in the no-dividend club, neither Alphabet (NASDAQ: GOOG) nor Berkshire Hathaway (NYSE: BRK.B) pays a dividend.
EBAY is in the same club and it costs a lot less than those great stocks. This means that its’ share value might be in for big growth in the near future if revenue growth resumes.
Is eBay Capable of Growth?
Yes, eBay is capable of some revenue growth, its revenues have been growing slowly but continuously for the past three quarters. eBay reported revenues of $8.593 billion in September 2015 that fell to $8.592 billion in December 2015, grew to $8.66 billion in March 2016, rose again to $8.788 billion in June 2016 and reached $8.906 billion in September 2016.
EBay added $313 million in revenue over the past year which proves its business is far from static. If it reports that kind of growth for another year; expect a boost in share value.
More importantly eBay is a good position to deploy new technology to increase its business. It recently launched a new portal called eBay Collective that uses artificial intelligence to sell rare and high value items.
That serve is designed to generate extra cash by selling high-end goods such as Andy Warhol-signed screen prints, Business Insider Intelligence reported. EBay hopes to swipe business from traditional auction houses like Bonham’s with an artificial intelligence solution that will drive conversations.
One use for eBay Collective will be to help the company enter the furniture business. Business Insider estimates that one fourth of all furniture purchases in 2016 will take place online.
Even if it fails, Collective shows eBay is a good company, because it has the resources to easily survive such a failure. So yes folks; eBay is still relevant and it has a very bright future. Value investors should take notice of this auction site.
Disclosure: Your friendly neighborhood blogger is an Amazon merchant who owns shares of eBay.