I am preparing a shopping list in case the market has a sale in the next few weeks. One of the stocks I am looking at is eBay (symbol:EBAY). While I am concerned about owning a company that's earnings is dependent on consumer spending, I believe the valuation of the stock more than incorporates a negative consumer outlook. Analysts expect eBay to earn $1.94 next year. Including the over $3 a share in cash eBay holds the stock trades at 10 times next years earnings. If one considers the growth valuation Skype and PayPal should receive, the auction business trades at a single digit multiple.
I believe a certain part of eBay's business is vulnerable. There are people that are addicted to eBay just like there are people addicted to the Home Shopping Network. Those people will probably cut back in a bad environment. Additionally, a weaker economy will effect business and lower credit availability will not help, as many use credit cards to purchase on eBay. However, much of eBay's business comes from people trying to save money and many people might look to eBay in tough times as a way of selling some items they don't need to raise cash. Even if one assumes a recession-depression next year, and a 20% earnings miss, eBay still trades at 12 times trough earnings. That's something I could live with. I am not expecting eBay to earn $1.94 next year.
My only hesitation is that according to Barron's, Wedge Partners believes eBay will have an earnings miss this quarter. Wedge Partners is a research firm that does excellent work. If the earnings miss is coming now, I might consider waiting until after earnings. The jury is still out.