Earnings

Comparing eBay Inc. (EBAY) and PayPal Holdings, Inc. (PYPL)

eBay Inc. (NASDAQ:EBAY) shares are up more than 12.45% this year and recently increased 0.69% or $0.29 to settle at $42.44. PayPal Holdings, Inc. (NASDAQ:PYPL), on the other hand, is up 4.96% year to date as of 02/14/2018. It currently trades at $77.27 and has returned 2.22% during the past week.

eBay Inc. (NASDAQ:EBAY) and PayPal Holdings, Inc. (NASDAQ:PYPL) are the two most active stocks in the market based on today’s trading volumes. The market is clearly enthusiastic about both these stocks, but which is the better investment? To answer this, we will compare the two companies based on the strength of their growth, profitability, risk, returns, valuation, analyst recommendations, and insider trends.

Growth

One of the key things investors look for in a company is the ability to grow earnings at a high compound rate over time. Analysts expect EBAY to grow earnings at a 9.44% annual rate over the next 5 years. Comparatively, PYPL is expected to grow at a 19.25% annual rate. All else equal, PYPL’s higher growth rate would imply a greater potential for capital appreciation.



Profitability and Returns

Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return., compared to an EBITDA margin of 22.95% for PayPal Holdings, Inc. (PYPL). EBAY’s ROI is -5.70% while PYPL has a ROI of 10.10%. The interpretation is that PYPL’s business generates a higher return on investment than EBAY’s.

Cash Flow 




Earnings don’t always accurately reflect the amount of cash that a company brings in. EBAY’s free cash flow (“FCF”) per share for the trailing twelve months was +0.77. Comparatively, PYPL’s free cash flow per share was -0.27. On a percent-of-sales basis, EBAY’s free cash flow was 8.15% while PYPL converted -2.47% of its revenues into cash flow. This means that, for a given level of sales, EBAY is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. EBAY has a current ratio of 2.20 compared to 1.40 for PYPL. This means that EBAY can more easily cover its most immediate liabilities over the next twelve months. EBAY’s debt-to-equity ratio is 1.24 versus a D/E of 0.06 for PYPL. EBAY is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

EBAY trades at a forward P/E of 16.48, a P/B of 5.44, and a P/S of 4.42, compared to a forward P/E of 27.87, a P/B of 5.81, and a P/S of 6.86 for PYPL. EBAY is the cheaper of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. EBAY is currently priced at a -9.59% to its one-year price target of 46.94. Comparatively, PYPL is -9.15% relative to its price target of 85.05. This suggests that EBAY is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.40 for EBAY and 2.00 for PYPL, which implies that analysts are more bullish on the outlook for EBAY.

Insider Activity and Investor Sentiment

Comparing the number of shares sold short to the float is a method analysts often use to get a reading on investor sentiment. EBAY has a short ratio of 3.29 compared to a short interest of 1.26 for PYPL. This implies that the market is currently less bearish on the outlook for PYPL.

Summary

eBay Inc. (NASDAQ:EBAY) beats PayPal Holdings, Inc. (NASDAQ:PYPL) on a total of 8 of the 14 factors compared between the two stocks. EBAY is more profitable, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. In terms of valuation, EBAY is the cheaper of the two stocks on an earnings, book value and sales basis, EBAY is more undervalued relative to its price target. Finally, MDLZ has better sentiment signals based on short interest.

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