Email | Print    Type Size  -  +

eBay's biggest bargain: The company's shares

Investor Daily: With a low stock price and high profit margins, it's time to bid on eBay.

By Stephen Gandel
Last Updated: December 11, 2008: 10:30 AM ET

NEW YORK (Fortune) -- Back in 2000, shares of eBay, best known for its online auctions, hit a price-to-earnings ratio of 2,700, and were the darlings of growth investors everywhere. These days the company's shares have a new valuation about 1/300th of its old peak - its P/E is a lowly 9 based on next year's earnings - and a decidedly different fanbase. Grantham Mayo's Jeremy Grantham, Mason Hawkins of the Longleaf Partners Fund and Ariel Capital's John Rogers all have long-term track records for picking stocks that outperform the market, and all three have recently been buying eBay shares for their clients' portfolios. "This is a classic growth stock at a value price," says Ariel's chief investment officer Charlie Bobrinskoy.

eBay's shares have a compelling value story. Here's the math: At a recent price of $14, the company has a market cap of $18.5 billion. On top of its well-known auction site, eBay (EBAY, Fortune 500) also owns PayPal, the largest processor of Internet transactions, and Skype, which charges customers a cut rate to make their phone calls over the Internet. These two businesses generate $600 million in cash a year. Attach a multiple of 20 (Amazon (AMZN, Fortune 500), eBay's closest competitor, trades at 32 times its cashflow) and PayPal and Skype alone are worth $12 billion. "PayPal is an excellent business in its own right," says Sanford C. Bernstein analyst Jeffrey Lindsay.

What's more, eBay has $3.3 billion in cash on its balance sheet. And eBay also owns a number of smaller businesses such as StubHub, which allows people to buy and sell concert and sports tickets. Add it all up and investors who buy eBay's shares today are nearly getting the company's best-known business for free.

eBay's namesake business has had its issues. But the online retailer still has 49 million visitors a month - about a million more than Amazon - and generates $1 billion in cashflow a year. What's more, items sold on eBay are generally lower priced than the same items on Amazon or at Wal-Mart (WMT, Fortune 500) - probably a good thing in this economy.

New management has been addressing many of the Web site's long-time customer complaints. In the past year, the company has pledged that PayPal would refund money from fraudulent transactions, expanded its customer service efforts, and changed its fee structure to encourage sellers to list their items with a "Buy It Now" option for buyers who don't like auctions.

Some investors worry about eBay's recent purchase of Bill Me Later. But the online lender has had half the losses of other credit card companies, and it generates higher fees per transaction then either PayPal or eBay. The acquisition won't contribute to eBay's bottom line in the next few years, but down the road, especially after the credit crunch is over, those higher fees should boost eBay's profit margins, which are already far higher than Amazon's. "This is a $30 stock," says money manager Nick Calamos. "It's extremely cheap."

Looking for guidance in navigating these choppy markets? Let us know which topics you'd like us to cover and we'll try to address your questions in an upcoming Investor Daily. Please note: Fortune cannot give personalized advice on specific investments in your portfolio.  To top of page

Company Price Change % Change
Bank of America Corp... 16.27 0.05 0.31%
Apple Inc 103.30 0.80 0.78%
Staples Inc 12.63 0.95 8.13%
Facebook Inc 76.68 1.86 2.49%
Intel Corp 34.57 -0.35 -1.00%
Data as of Sep 2
Index Last Change % Change
Dow 17,067.56 -30.89 -0.18%
Nasdaq 4,598.19 17.92 0.39%
S&P 500 2,002.28 -1.09 -0.05%
Treasuries 2.42 0.08 3.24%
Data as of 2:33am ET
More Galleries
Revolving door: Washington to Wall Street Former House Majority Leader Eric Cantor is headed to Wall Street. See who else has jumped the political ship for a lucrative career in finance. More
How to keep your naked photos out of hackers' hands Follow these steps to make sure that your nude photos and other sensitive information won't get hacked. More
9 reasons to be excited about Windows 9 Microsoft is expected to begin showing off Windows 9's features later this month. Here are the expected changes you should be thrilled about. More
Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.