eBay Delivers the Goods and Just Became Better

NEW YORK (TheStreet) -- If eBay (EBAY) were valued near Amazon's (AMZN) 160 or more P/E valuation, eBay shares would trade for over $500.

When you consider eBay earns more profit per share than Amazon, maybe it's eBay shares that should trade above $300. eBay has so many superior metrics compared to Amazon it's hard to know where to begin. Take a look at the two companies' cash-flow history.

EBAY Free Cash Flow TTM Chart EBAY Free Cash Flow TTM data by YCharts

Wall Street is in love with Amazon's revenue growth machine, but between the two eBay is the one that continues to deliver shareholder value, at least on the bottom line. eBay's latest example of controlled expansion is through its PayPal division.

Braintree Payment Solutions agreed to be acquired by PayPal for $800 million. eBay has about $11 billion in cash and equivalents, based on the latest reported balance sheet. Because the deal is expected to close during the fourth quarter, investors shouldn't expect a material change in PayPal's 2013 processing volume. According to eBay's CEO John Donahoe, "Braintree is a perfect fit with PayPal."

Braintree is a six-year-old, fast-growing startup designed to make mobile payments easy, and is exactly what PayPal wants to maintain the lead in online payment processing. Amazon, Google ( GOOG) and others are actively trying to duplicate the cash cow PayPal has become.

Braintree reportedly processed over $3 billion in payments in 2011 and, according to research firm Gartner, the mobile payment market is expected to grow to over $235 billion this year, and more than $700 million by 2017.

Besides Braintree's organic growth, the company has grown through mergers. Last year Braintree acquired Venmo for $26.2 million, a mobile app that allows friends to transfer money for free. Venmo gives PayPal another method to bring consumers into its ecosystem and generates profits when users fund transfers through a credit card.

EBAY Gross Profit Margin Quarterly Chart EBAY Gross Profit Margin Quarterly data by YCharts

Based on Verfone Systems' ( PAY) margins, relative expanding revenue from mobile processing may create some margin pressure for eBay, albeit from a larger base. However, margins from payment processing are impressive in their own right and solidify PayPal's dominance in the near term.

While Amazon is spending money to build warehouses and creating greater risk exposure in the process, warehousing costs for eBay are expanded and contracted through eBay's sellers. Owning the marketplace venue and payment processing over logistics handling gives eBay greater flexibility and higher margins compared to Amazon.

Shareholders should count on PayPal's growth and success and, more importantly, an expanding return on investment. The market hasn't figured it out yet, but as investors realize the relative value in owning eBay versus Amazon I expect the shares to reflect the real bargain.

The average analyst 12-month price target is $63.41, and the most optimistic pricing $75. I think the targets are too low. Maybe not over $500 immediately, but I like eBay's prospects of moving in that direction.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Robert Weinstein is an active trader focusing on the psychological importance of risk mitigation, emotion and financial behavior of market participants. Robert co-founded the investing blog StockSaints, where he writes a journal about his trading activity and experiences.

In addition to TheStreet, Robert also contributes to Real Money Pro, providing real-time trading ideas for stocks, options and futures.

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