There has been a lot of buzz in the financial world about Ebay (NASDAQ:EBAY) these past couple months as the company makes a series of announcements regarding its plans for the coming year. Its stock rallied more than 8% following all the good news and the report of an exceptional fourth quarter in 2013.
The good news for investors
Ebay exceeded analyst’s expectations earlier this year with the release of the fourth quarter report showing earnings higher than predicted. Its net earnings were 65 cents per share, up from the 57 cents per share earned in the fourth quarter of 2012.
More good news comes with the company’s announcement of its plan to buy back a full $5 billion in stock, signaling the company’s optimism and confidence in its future business strategy. Part of this future strategy may include spinning off PayPal into its own company if investor Carl Icahn (Trades, Portfolio) gets his say in the matter. The payment processing service is growing at an increasingly faster pace and soon may overtake the company in sales. In the last quarter of 2013, PayPal accounted for nearly half of Ebay’s total revenue.
- Warning! GuruFocus has detected 5 Warning Signs with EBAY. Click here to check it out.
- EBAY 15-Year Financial Data
- The intrinsic value of EBAY
- Peter Lynch Chart of EBAY
Shifting from full ownership to a mutually beneficial partnership structure could allow for PayPal to expand further, a potentially great situation for current stockholders. However, Ebay has expressed some resistance to Icahn’s proposal and it is not yet confirmed whether it will happen or not.
Icahn brought more intriguing news as he nominated two employees from Icahn Enterprises (Jonathan Chrstodoro and Daniel Ninivaggi) to sit on Ebay’s board of directors. His request is still under review by the company but should it go through, it could help push his proposal regarding the PayPal spin off through. If the company resists his nominations, Icahn has made it clear that he is ready for a proxy fight to ensure his selections go through. Once he gets his nominations to the board of directors cleared, he has every intention of pushing for PayPal to be separated from its parent allowing for greater growth and greater returns to investors.
What else to look forward to
The company currently has a remarkably low debt to equity ratio of 0.17 meaning it is more than capable of meeting its debt obligations, especially in light of its higher than expected growth reported for the last quarter. This news, together with the fact that Ebay’s profit margins have been steadily growing for the past two quarters, indicate a strong financial basis on which the company can continue to grow.
Under the leadership of John Donahoe, the company’s current CEO, Ebay has made more than 30 acquisitions and multiple strategic partnerships over the past five years. Such aggressive expansion and planning for a shifting market in the future has already begun to pay off and shows every sign of continuing to pay off well into the foreseeable future.
Another thing to look forward to is Kabbage which is offering much needed loans to small start-ups all over the world. Most of its clients are e-commerce businesses but it has been expanding its services to brick and mortar start-ups, too. Many of these small companies make use of Ebay to sell their products. In this way, Kabbage contributes to the increase in business traffic occurring on the website.
While big banks and other traditional sources of funding are often closed off to such small businesses, Kabbage has tapped into a previously untouched market, providing a much needed boost to business in our struggling economy. Businesses that would otherwise never get off the ground are now able to expand through sites like Ebay and see real growth. This will also mean substantial growth for Ebay in terms of revenue earned from its online marketplace division.
This new online loan service has started seeking beneficial partnerships with other companies which include both increased publicity and a percentage of Kabbage’s profits. If Ebay agrees to such a deal, it could potentially see numerous benefits as this financial company has a lot of room to grow and a largely untapped market in which to realize that growth.
Ebay has been making a rather rocky upward climb over the past years. Although earnings from its online marketplace continue to grow, the pace is beginning to slow and the company will have to make some changes in order to accommodate for this slowing rate. Investors could potentially benefit from a split between Ebay and PayPal as the latter looks poised to overtake its parent company in the next few years. Both must be prepared to face increasingly tough competition as more and more businesses try to claim their share of the growing ecommerce market.
With the right partnerships and the right strategy, however, Ebay looks ready to hold its ground and beat out competition, making it potentially one of the great momentum stocks of the coming year. Investors would do well to invest now while the company’s stock is still below its 52 week high in order to maximize returns on the investment.