An analysis of ebay

lucas_is_king

Newbie
1 0
Reasons to be bearish of Ebay:

P/E ratio - Great investors such as Paul Getty and Warren Buffet have in the past stipulated that a P/E of about 10 puts a stock on a reasonable valuation, anything from 10-20 is reasonable in a bull market, but anything above that is likely to by unsustainable in the long term. Ebay's current P/E is in the region of 98. You will need to hold the share for 100 years in order to see a return on your money, assuming the stock price were to stay flat which of course it won’t.

Analysts who have been pumping these stocks recently say that the P/E ratio means nothing for technology stocks, or that a P/E of 100 is reasonable for a growth stock. I, for one, consider this an absurd statement. At the end of the day the purpose of an investment is to make money, whatever sector the company operates in and therefore general investment principles apply. Ebay's growth is shrinking fast, and there is no way that P/E is going to drop to anything like a reasonable level without the share price dropping substantially.

Market capitalization - the present market value of Ebay is greater than that of GM and Ford. Is a company with a handful of offices worth 44 billion? I think not.

Insider selling. Directors have been selling far more shares than they have been buying in the past year, look at the stats. This could be taken as a sign they know their companies are overvalued. People might argue that they have been simply cashing in stock options that were given to them at lower levels and it is natural for them to want to make a profit. My counter is that if the situation with these companies is so positive, then surely the price will continue to rise and therefore if they thought so they would continue to hold and sell later.

Overall US Market Situation:

Whether ebay remains overvalued or not may have as much to do with the overall market as the individual situation. My personal opinion is that since the Iraq war ended, the US stock market in particular has moved up too far too fast and we could see another sell-off. I am debted to a poster on another borad who made these original points, which I have made a couple of additions to.

REASONS TO BE BEARISH

1) Expanding triangle on the Dow chart shows the long term trend to be bearish. There is also a head and shoulders formation on the S & P 500 chart which is also a bad sign.
2) Volume (daily charts)since Oct 2002 has been gradually drying up whilst the market has had a huge bull run. This is very bearish and a very reliable signal.
3) Insider selling has been at historic levels. Why are these directors etc. selling their options and shares at a rate of 35-1 (or thereabouts, compared to directors buying their shares)? If they were so confident the market is entering a new huge bull phase why sell now, why not wait a few years?
4) GDP growth has hit a huge figure like the last 3 months of 8.2%, a figure this high historically has been at a market top.
5) P/E ratios are well above 30 on the sp 500, historically extremely expensive. I have mentioned above my opinions on the fact that the Ebay is on a P/E of roughly 100.
6) Media is totally bullish, not a bear in sight. Normally when this happens, a fall occurs.
7) Retail sector is starting to weaken, could the consumer be all out of borrowed money? If so, this will cause corporate earnings to weaken and sentiment to change. Less money to buy junk off ebay with.
8) Employment levels dropping...just - despite all the stimulation by the US Government and the money pumped into the economy to pay for action during the Iraq war.
9) Inflation desperately low despite all this stimulus.
10) The fed willing to let the dollar plunge to help an anaemic economy is a sign of desperation. Will they want to risk hyperinflation to get a bit of inflation into the economy? Greenspan has said he will not put up interest rates to slow down stock price rises, meanwhile the dollar continues to tank against other major currencies.
11) If there is a high level terrorist attack, the market will probably tumble. The US has been on high alert lately and as much as we hope otherwise, Osama and co. are not dead yet by any stretch of the imagination.
12) US Government debt is absolutely astronomical.
13) Various states in the US almost bankrupt.

REASONS TO BE BULLISH

1) George Bush wants to be re-elected! Traditionally if stock prices fall in an election year, there is no re-election. Therefore GWB will want the market to go up and will use all means necessary to ensure that it does. To use one of his own phrases: Do not mis-underestimate him.

Sentiment:

At the moment, investors seem to have a strong desire to see the market going up and it has done just that. Anyone betting against sentiment is taking a huge risk. Ebay is now worth even more than it was during the infamous dotcom bubble of 1999/2000. Investors who lost a lot in the crash want to make back their losses and there really is no telling where Ebay will go to in the coming months.

Conclusion:

My conclusion is that at some point in the future Ebay will suffer a slump in its share price. I think American investors will eventually pay the penalty for not learning the lessons of the last crash and in my opinion that day will come before the end of 2004, regardless of what Mr Bush wants to happen.

Ebay may well have decent growth potential over the next 5 years, despite the fact that it could be argued growth is shrinking. However my question is: are you prepared to hold for 5 years to see where the share price goes? The current rally isn't going to last forever and stocks that are fundamentally overvalued are going to be the first to go down.

As always all above is IMHO - DYOR, good luck to all traders. Plenty cash to be made on both up and downside in the next year. Longer term, more to be made downwards than up I feel.
 

nomish

Junior member
42 0
EBAY has been a great performer last year. The difference with tech stock today is that they are showing signs of profits. However, these stocks are well over priced.

EBay has a problem of legal issues with PAYPAL etc (read their annual report) which keeps them getting sued.

The idea behind ebay is great as it is a continuous growth cycle. but what goes up has to come down.

You are probably right that its not worth holding for the long-term, but to swing trade this stock is great, its high beta makes about 5%+ in one 2 week trade compared to holding the QQQ for the same period with half the returns.
 

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