eventually surfaced, this time from AllThingsD. In it, eBay CEO John Donahoe admitted that his company's outlook may have been a bit too downbeat. He said, "the truth is Bob
Swan, CFO and I both have colds. I think it came across more negative than intended." While blaming a cold may perhaps be a first, it was good for the CEO to clear the air for shareholders. Although in the report he still expressed caution, Donahoe did suggest that the government resolution could help holiday shopping. Regardless, I think shares could be undervalued. Up 2.3% this year, the stock is lagging the S&P 500, which is up nearly 22% in 2013. Using the middle of eBay's fourth-quarter estimated earnings range, we can predict that eBay will earn $2.70 a share on $16.06 billion in revenue in 2013, an increase of 14.4% in earnings and 13.9% in revenue from 2012. Of course, just because the company has demonstrated double-digit growth year-over-year, doesn't mean the share price has to appreciate. If the company isn't growing as fast as analysts had hoped, the valuation will compress, adding downward pressure to the stock price.
But shares are semi-compelling for a few reasons, valuation one of them. The stock has drifted lower to $50 three times dating back to December 2012. Each time, buyers flooded the stock, driving the price back higher. Although the stock has become exhausted five times this year over the $56-level, that's still a ways away for those looking to get long the stock at the current price of $52. Aside from the low-$50 level acting as excellent support, the PEG ratio, which incorporates price, earnings and growth, is relatively low. A PEG measurement equal to 1 would represent a fairly valued stock. The lower the measurement, the cheaper the stock is and vice versa. Also, growth companies usually have a high PEG ratio, along with other high valuation measurements. EBay has a PEG ratio of 0.99, based on a one-year forward outlook. Via Yahoo! Finance, the five-year PEG ratio is still 1.31, which isn't ridiculously high. However, five years is a long time frame and I prefer to use a one-year outlook, or possibly a two-year outlook in some situations. Given that eBay's posts double-digit earnings and revenue increases, has an acceptable valuation and is resting near solid price support, I favor the long side. I'll admit, I used to own the stock with a long-term outlook, but it proved too frustrating. With management constantly sandbagging guidance and the disappointing price action made it hard to own compared with other growth stocks in solid uptrends. For those with experience in the options world, selling short some $50-strike put options could prove rewarding. Depending on what the premium is, put-sellers will be assigned shares of eBay only if it closes below $50 on expiration day. Given the price action over the past 10 months, that outcome seems unlikely. Nevertheless, should eBay close below that benchmark, the put-seller would own shares of eBay below $50, a level not really seen since November 2012. At the time of publication, the author was long eBay. -- Written by Bret Kenwell in Petoskey, Mich. Follow @BretKenwell