Is eBay Undervalued?

In what was surely one of the cleanest bounces off a support line in the past few weeks, shares of eBay (NASDAQ: EBAY) fell more than 30%, came within $0.01 of their previous low and haven’t looked back since. On the way down, they gave up all of 2019’s gains but compared to many other names out there, this wasn’t too bad a return for what was the worst Q1 in history. Consider this, at the lows of late March, eBay stock was only back trading at December 2018’s levels while the S&P 500 was back at November 2016’s levels.

Since then, shares of the $25 billion e-commerce marketplace have jumped 20% and are close to undoing half of Q1’s damage. Even with this current recovery in equities well underway, the VIX is still elevated, but Guggenheim couldn’t help themselves yesterday in upgrading the stock to a Buy rating from Neutral. They also slapped a $36 price target onto it which represents a premium of about 20% to where the stock closed on Friday.

Favorable Risk / Reward

In particular, they noted "at these levels, and in this environment, we believe the risk/reward is favorable and see both defensive traits and positive catalysts over the next 12 months.” The lack of any inventory risk or mounting rental costs for non-revenue producing brick n’ mortar stores offers investors significant peace of mind.

On top of that, eBay has a strong balance sheet, a healthy cash flow and a business model that isn’t anywhere near the firing line when it comes to vulnerable industries and businesses like Disney (NYSE: DIS) or Boeing (NYSE: BA). With more people than ever before confined to their homes, online browsing and shopping isn’t going anywhere. After the recent selloff, their P/E ratio is below 15 which for a billion-dollar tech stock is about as low as you get. For context, Amazon’s (NASDAQ: AMZN) P/E ratio is over 85.

Amidst a remarkable 7% rally in the S&P 500 during the Monday’s session, eBay stock tacked on more than 6% and investors would do well to consider a long position in such a robust name.

Activist Shareholders Involved

While the company has had its fair share of struggles in retaining market share against Amazon’s rise and dominance in the e-commerce market, the price action in the past three months is very telling. In their last earnings report in late January, they beat analyst expectations for both EPS and revenue. New investors might also take comfort in the fact that one of the company’s largest shareholders is Starboard Value, a New York-based hedge fund known for investing in undervalued companies and taking a very active approach.

They’ve been very vocal in its requests/demands of eBay’s management. As recently as Q1, Starboard were pushing them to create a more aggressive operating plan and to separate the classifieds business. In a letter to eBay’s board in early February, they said “we continue to believe that eBay is deeply undervalued and that significant opportunities exist to create value for the benefit of all shareholders based on actions that are within the control of management and the Board.” Considering shares are trading well below the levels they were at when the letter was written, it definitely feels like there’s a bargain to be had at these prices.

In case equities take another dip in the coming weeks, investors have an attractive entry point to size up at the $26 level. This is where shares bounced last month and during a dip in 2018. However, they might not even get down there again though. On the daily chart the MACD has just had a bullish crossover and with the kind of attention eBay is getting from the big players, it’s unlikely to remain as cheap as it is for much longer.