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P/E Means Price Is Expensive For Ebay Inc. (EBAY)

 March 22, 2013 09:41 AM
 


(By Rich Bieglmeier) Although eBay Inc. (EBAY) managed to swim against the stream of selling on Thursday, March 21, 2013, iStock thinks the NASDAQ 100 member is an underweight.

A long time market axiom is "earnings are the mother's milk of stock prices," which simply means a company's share price will reflect its earnings growth, or lack thereof, over the longer-run. 

And, earnings are the basis for iStock's view on eBay. Since 2008, the online auction and buy now site's EPS have grown by an average of 17.66%. There have been better and worse years. During the same timeframe, the average price-to-earnings ratio (P/E) for the owner of PayPal has been 16.84. As you can see, eBay's P/E tracks at 95.34% of the company's earnings growth rate despite the ups and downs of the bottom line. Quite frankly, iStock loves 1 to 1 P/E to EPS growth ratios.

[Related -eBay Inc (EBAY) Q4 Earnings Preview: About to Be Bid Lower?]

With eBay's current history in mind, analysts forecast the company's earnings to grow by 15.7% in 2013 and 16.8% in 2014. At a 1 to 1 P/E to EPS growth rate, eBay shares would be worth $45.97 using 2013's consensus of $2.73, and $53.72 with 2014's $3.19.

Now, it is important to remember that Wall Street tends to discount the P/E ratio relative to profit growth. Using the average discount and estimates for this year and next, we come up with price targets of $40.86     and $51.09, respectively. You can see why we think eBay is a hold at $52.92, as of March 21st's closing price of $52.95.

[Related -ETF Periscope: Sentiment On Main Street At Odds With Jubilation On Wall Street]

Much like eBay's price performance on this day, iStock is swimming against Wall Street with our viewpoint. "Buy" is the consensus opinion among analysts with a price target of $60. Of course, we could both be right.

At $60, eBay would be valued at valued at 21.98 times 2013's consensus estimate. In the last 1,124 days of trading, the NASDAQ member's highest P/E is 28.75; however, eBay traded with a P/E of 21.98 or higher only 22.42% of the time since October 2, 2008. It seems to us that, at some point, the services company's P/E will revert or regress towards the norm. Today's P/E is 26.62; meanwhile, shares have traded with a lower P/E more than 96% of the time since October 2008.

Overall: eBay Inc. (EBAY) is expensive based on its recent P/E history. Of course, there are plenty of other factors that will impact the company's share price. That being said, iStock thinks eBay is priced for perfection, and that means any earnings hiccup could be painful for shareholders.

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