I am used to buying things on online marketplace eBay (NASDAQ: EBAY). But after falling a third in the past year, could now be a good moment for me to buy eBay shares for my Stocks and Shares ISA?
Why I like the business
As a user, I find different elements of eBay quite frustrating. But I still use it because it offers me a range of products I simply could not find anywhere else.
That gives eBay a unique competitive advantage, or a moat as Warren Buffett would call it. It can use that to increase prices and make substantial profits. In fact I think it could do that far into the future.
What if the company overestimates its pricing power and new rivals undercut it on price? I do not think it would matter much. eBay is a classic example of a business with what is known as a network effect: the more people that use it, the more useful it becomes to them. A new rival would struggle to attract buyers due to a limited offering. In turn that would make it hard for such a site to attract sellers. By contrast, eBay’s large user base creates a virtuous circle.
I think eBay has a simple but spectacular business model that could endure far into the future.
eBay shares are looking unloved
Clearly not all investors share my enthusiasm for the investment case. The eBay share price fall means that the internet giant now trades on a price-to-earnings ratio of 12. That looks like excellent value to me. The company’s dividend yield is 1.8%.
There are risks to the business that help explain why its price has tumbled. The pandemic-era surge in online shopping has not lasted. That helps explain why eBay’s reported revenue in the first quarter fell 6% compared to the prior year period. Earnings were negative, meaning the company lost money in the quarter.
I think the long-term demand trends are positive. Online shopping is clearly here to stay for many people. I expect it to keep growing over time, especially for many of the specialist items sold on eBay. While a recession could hurt revenues for many retailers, eBay is a modern form of jumble sale where people can find real bargains. So I think it could thrive even in tough economic times.
I see value
I do not think the short-term trends detract from the appeal of the eBay investment case, though. The business model has been proven over decades and looks excellent to me. That should enable the company to make profits for a long time, while its pricing power could help it boost margins in future.
The current valuation looks cheap to me for such a strong business. I would consider adding eBay shares to my portfolio because of that.
