About eBay Incorporated

The company eBay Incorporated

The company eBay Incorporated, which is traded on the Nasdaq Global Select Market, is examined in the paragraphs that follow (eBay Incorporated, 2017). EBAY is its ticker symbol. I chose eBay for my research because I am a customer and enjoy the services provided by the business, especially the live auctions where one can find unusual things.

The company's various facets

The following sections include information on the company's various facets, including a study of its profitability, comparisons of its size to that of its rivals, and a discussion of whether it is wise to buy eBay stock.

Opinions on eBay's stock as an investment

At the beginning of the fourth quarter of 2016, there was a market expectation that the share price of eBay would increase in the following one year. Hough (2016) predicted that there was a possibility that the share price would increase by 25%. He attributes this to changes that eBay's management is currently undertaking on the website. The Financial Times (2017) also states that it is likely that eBay's stock will outperform the market in the current fiscal year. As such, analysts are advising existing stockholders to maintain a 'hold' position on this stock.

Risk involved in investing in eBay's stock as compared to other firms

An investment in eBay's stock presents a greater risk to investors as compared to its competitors. One aspect which is common across eBay and its competitors such as Alibaba Group and Amazon is that these three companies do not pay cash dividends to its common stockholders. Therefore, one may assess risk based on the capital gain expected from investing in each of these stocks. eBay's stock price has not increased significantly since 2015. The average market price per share was $46.60 in the fiscal year 2015. Currently, eBay's stock is trading at an approximate value of $31 per share. Furthermore, eBay's revenues have not increased by a significant amount. Therefore, the risk in purchasing eBay's stock is high at the moment because stockholders are not likely to make a good gain on their investment in the foreseeable future.

Financial analysis

eBay faces stiff competition from other players in the same sector. According to the company's annual report for the year ended 31 December 2016, competition is one of the risk factors to which the company is exposed. (eBay Incorporated, 2017). The company faces both online and offline competition from players such as Apple, Facebook, Google, Alibaba, Target, Wal-Mart and Costco, among others. Some of these entities have a larger capitalization than eBay and offer services and products which eBay does not offer, hence giving these entities an advantage against eBay. (eBay Incorporated, 2017).

Size of eBay in relation to its competitors

From an analysis of annual reports of the various entities, eBay is smaller than its competitors. One of the factors considered in making this assessment is the amount of revenues reported by eBay and its competitors in any given fiscal year. eBay earned revenues amounting to US$ 8,592 million during the year ended 31 December 2015. In the year ended 31 March 2016, Alibaba Group Holdings reported revenues amounting to US$ 15,686 million. In its 2015 fiscal year, Amazon earned revenue amounting to US$ 107,006 million. However, Hough (2016) attributes this significant variance to the fact that eBay's revenue comprises fees earned from transactions while some of its competitors include product sales as revenue in addition to fees. Net profit of eBay is also lower as compared to Alibaba Group. Alibaba Group recorded net profit amounting to slightly over US$ 11 billion. eBay's net profit in the same fiscal year was slightly over one billion dollars. This also goes to support the fact that eBay is smaller than its competitors.

Pace of growth for eBay

In the last three fiscal years, eBay's performance has remained constant and the company has not experienced significant growth. This is evidenced by the change in revenue and net profit. From 2014 to 2015, net revenue decreased by two percent and income from continuing operations before income tax also declined by four percent. From 2015 to 2016, revenue increased by four and a half percent while profit before income tax increased by 51%. This was attributable to an increase in revenue and a decrease in general expenses, provision for transaction losses and amortization costs of intangible assets. (eBay Incorporated, 2017). Net income is not an adequate measure of growth in the year ended 31 December 2016 because the company reported a significant income tax benefit in that year while in the previous two years, it reported an income tax provision. The effect of the income tax benefit is that it increased net profit. However, it can be considered as a one-off occurrence for the purpose of this analysis.

Profitability

eBay has maintained overall profitability in the last three fiscal years. Net profit has increased on an annual basis, from the year ended 31 December 2014 to 31 December 2016. From 2014 to 2015, net profit increased by more than 100%. From 2015 to 2016, the company attained similar results with respect to net profitability. Net profit margin, which is derived as net profit divided by sales, was 0.5% in the fiscal year 2014, 20% in 2015 and 81% in 2016. The extraordinarily high level of profitability in 2016 is mainly attributable to an income tax benefit recorded in the year, as explained in the paragraph above.

Price to earnings ratio

Price to earnings ratio is calculated as market price per share divided by earnings per share. (Kaplan Financial Limited, 2012). The average market price per share can be obtained from item five of the annual report. The average price in 2016 was $24.18 while that in 2015 was $46.60. Diluted earnings per share in these two fiscal years were $6.35 and $1.42 respectively. Therefore, price to earnings was 3.81 and 32.82 in 2016 and 2015 respectively. Price to earnings ratio shows how much stockholders are willing to pay in order to receive one dollar of an entity's earnings. (Kaplan Financial Limited, 2012). The fact that the price to earnings ratio declined significantly from 2015 to 2016 shows decreasing confidence in the company's growth, that is, stock holders did not expect eBay to achieve a high level of growth in 2016.

Dividends

Dividend yield is calculated as dividend per share divided by market price per share. (Kaplan Financial Limited, 2012). However, eBay's policy is that the company does not pay cash dividends. Furthermore, management does not expect to commence paying cash dividends in the foreseeable future. (eBay Incorporated, 2017). Therefore, a dividend yield for eBay is not applicable.

eBay's future

Based on the performance of eBay in the last three fiscal years, the future of the company does not look promising. It is likely that its performance will remain constant in the foreseeable future.

Recommendation on eBay's stock

In my opinion, I would not recommend eBay's stock as an investment. One of the reasons for this is that the company does not pay cash dividends. Therefore, the only gain available to stock holders is capital gains upon an increase in stock prices. Another reason why I would not recommend this stock is that its performance lags behind that of its competitors. eBay operates in a highly competitive industry and without a high level of innovation, it may not perform better than its competitors. Consequently, its stock price is not likely to increase significantly in such a manner that will be beneficial to stockholders.

References

eBay Incorporated. (2017, February 6). 2016 Annual Report. Retrieved April 19, 2017, from https://investors.ebayinc.com/annuals.cfm

Financial Times. (2017, April 21). Consensus Recommendation. Retrieved from https://markets.ft.com/data/equities/tearsheet/forecasts?s=EBAY:NSQ

Hough, J. (2016, October 8). eBay Shares Could Rise 25% in a Year. Retrieved from http://www.barrons.com/articles/ebay-shares-could-rise-25-in-a-year-1475906011

Kaplan Financial Limited. (2012). Financial Ratios. In Financial Management (Chapter 17). Retrieved from http://kfknowledgebank.kaplan.co.uk/KFKB/Wiki%20Pages/ACCA%20F9%20Chapter%2017.aspx