eBay Remains A Winner

If any single Net company has the potential to be a long-term winner, it is eBay.

It has a hugely dominant market position, making it very difficult for competitors to challenge it. It has one of only four genuine Internet “brands,” the others being Yahoo, Amazon and AOL. Establishing a genuine brand that conjures up an image in the public’s mind is one of the toughest things to do in business, and probably even tougher on the Internet, because no one strolls by your storefront everyday or sees your product in the display case. Customers have to find you, or you have to find them. Having a brand name that people remember when they’re looking for something is a huge advantage on the Internet.

And unlike Yahoo and Amazon , whose fundamentals have come unglued over the last year, eBay hasn’t missed a beat. It has even held up better than AOL , which is no longer a pure Internet company anyway due to its merger with Time Warner, which in retrospect may have been a good move for shareholders.

eBay has also become something of a B2B company, particularly in these difficult times, which also gives it some counter-cyclical strength. For example, the number of Cisco items for sale on eBay has grown by 10% in the last month, to about 2,700 items (a good indicator of the state of Cisco’s business). It will be interesting to see what happens to eBay’s business when the communications equipment glut clears.

The problem with all this good news is that everyone knows it. The good news is built into eBay’s share price of $64.75 twice over. Literally.

eBay is trading at 163 times 2001 earnings estimates of 40 cents a share. It has a projected two-year growth rate of 80%. Using the PEG ratio (price-to-earnings growth ratio), 80 times .40 gives eBay a fair value of $32 a share.

Admittedly, eBay will likely top those estimates. But as we’ve seen over the last year, if you overpay for a stock, you usually lose money in the long run.

That said, we last wrote about eBay on April 20, when it was trading for $50-$56 a share (a wild day for eBay’s stock that turned out to be a short-term top). We said it was overvalued then, and it did dip as low as $44 in the subsequent pullback, but it never pulled back into a range where it became a reasonable long-term investment, which is what the PEG ratio helps determine.

eBay’s chart, however, looks like it may not provide long-term investors with a buying opportunity in the near future (see chart below). Unlike the Nasdaq, eBay has broken its main bear market downtrend line and put in a credible double-bottom to boot. That $50-$55 range should now be support, and we can’t find a whole lot of upside resistance between here and $70-$75. Unless eBay’s earnings grow a lot faster than analysts expect, the stock will likely remain pricey.