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Too late to catch the turnaround train at eBay?

Source: Reuters - Thu 24th Sep 2009

Cautious investors may have missed the major gains in eBay's stock price this year, but a growing belief in the Internet giant's comeback suggests the shares still have room to rise.

Some 45 percent of brokers tracked by Thomson Reuters I/B/E/S have a "Buy" or "Strong Buy" rating on eBay, compared with 51 percent with "Hold" ratings. One month ago, only 28 percent of analysts had a "Buy" or "Strong Buy" rating on the stock.

The happy chorus is late to the mark, as eBay shares have already more than doubled since early March, when the company outlined a three-year growth plan.

That compares to a 55 percent gain at Google Inc and a 32 percent rise in Inc in the same period.

Recent improvements to eBay's key marketplaces unit have met with positive response, contributing to increased traffic and sales and suggesting more sustainable growth going forward.

"It's a classic value turnaround play" explained Bernstein Research's Jeffrey Lindsay, who said his 12-month target of $28 for eBay shares may prove to be too conservative. "Probably there is upside beyond that."

Operating margins of more than 40 percent in eBay's marketplaces - compared with Amazon's 4 percent margins - mean that any growth will immediately have an impact on the bottom line, Lindsay said.

"If eBay can move from 2 percent growth to 4 percent growth in the core, it has massive cash flow implications" he said. 

EBay's booming PayPal Web payments unit is seen as a future growth driver and a deal to sell online phone company Skype is considered a positive.

At eBay's marketplaces unit, which is moving away from auctions to focus on fixed -price sales of goods, analysts are cheered by better traffic, a report showing August sales may have been positive and improvements in areas such as eBay's seller rating system, search, dispute resolution and listings.

"The core marketplaces business has turned a corner; while the secondary market for goods provides a long-term growth opportunity" UBS's Brian Pitz wrote in a note last week.


While many investors may have missed the biggest gains this year, eBay's valuation is still below its peer group, according to Brigantine Advisors' Colin Gillis, who said his target price of $30 is the most bullish on Wall Street.

Ebay's price-to-earnings ratio of 14 times estimated 2010 earnings - which Gillis called "a broken Internet company valuation" - is below its historical valuation and the sector average of 18 times forward-looking earnings.

Investors will look for proof that eBay's new fixed-price strategy is working when it releases third-quarter results next month, Gillis said.

"The September quarter is going to show us the turn" he said. "EBay hasn't proved it yet. We're pulling data points but we want to see this fixed price strategy working and pulling earnings to the bottom line."

Positive news will further boost eBay's valuation, estimates and ultimately shares, he said. 

"You can have both catalysts happening in eBay" Gillis said. "Investors will reward it a higher multiple... and there is ample room to drop more to the bottom line."

Still, the recent run-up in shares - which are up 10 percent this month alone - means some prefer to wait. "We think the already strong run-up in share price this year warrants caution in the near term as a weak consumer economy weighs on eBay's core e-commerce business" wrote Argus Research analyst Joseph Donner, who rates the shares "Hold."

Donner, speaking to Reuters, said his more bullish colleagues have "a valid argument." But he is waiting to see real proof of growth in marketplaces, where sales are stabilizing, but were down 14 percent in the second quarter.

"I'm a bit more cautious about the supposed recovery than most people" he said. "That's their core business."

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