In the old days, Internet-related stocks were famous for not generating corporate earnings. New technology stocks that embrace the Internet, tradition retailing and mobile all together are able to generate large amounts of corporate earnings. The real secret is to have Internet-related stocks that embrace both some of the traditional aspects of business along with the new technology aspects to combine together and generate strong growth levels for corporate earnings.
Technology stocks are no different from other industries; innovation drives corporate earnings. Internet-related stocks have heavy competition to deal with and therefore innovation is even more important. The latest quarterly corporate earnings release of eBay Inc. (NASDAQ/EBAY) shows some interesting insights. eBay is not the same firm that you remember from several years ago.
eBay’s quarterly release showed that the biggest growth was in its subsidiary PayPal, with revenue increasing 32% in the first quarter for a total of $1.31 billion. The growth in PayPal is expanding from just traditional eBay transactions. New business venues include having a card reader for mobile phones that can accept credit card payments. PayPal also teams with The Home Depot, Inc. (NYSE/HD) to provide terminals for checking out merchandise. This innovation is certainly driving corporate earnings, and other Internet-related stocks should take notes and learn from one of the leaders in this sector.
In a brilliant move that is driving corporate earnings, PayPal is also benefiting from the current low-interest-rate environment, by allowing customers to pay in installments. While PayPal can borrow at the low corporate rate, it then can charge a higher rate to customers and make money off the spread. eBay itself is drastically changing, away from the auction format where it was a massive online garage sale, to a fixed format, adding a more business-like approach to the retail environment. eBay is also moving fast to develop online mobile technology for PayPal, as volume will surge 75% this year alone for a total amount of volume exceeding $7.0 billion.
Chart courtesy of www.StockCharts.com
All of this sounds good on the surface and I think that, when looking at Internet-related stocks, eBay is certainly one of the leaders in coming up with new and innovative ways to drive corporate earnings. However, the estimates for eBay’s future corporate earnings look very dull, with revenue guidance below previous estimates and forecasts for corporate earnings at $0.53-$0.55 a share, slightly below the current quarter’s corporate earnings of $0.55 per share. The consumer slowing and eBay is taking notice, assuming no real corporate earnings growth for the second quarter.
Trading at approximately 16 times this year’s corporate earnings, I certainly would not be buying the shares at this level. While I do love technology stocks and Internet-related stocks specifically, since I don’t see a large amount of corporate earnings growth for this year and a price-earnings ratio that isn’t very cheap, I can’t recommend buying eBay at this point.
I’m more interested in the potential for eBay to spin off PayPal over the next year or two. That portion of the company could generate strong earnings growth for a number of years if it were to be independent, so it could attain more business with other Internet-related stocks like Amazon.com, Inc. (NASDAQ/AMZN). Technology stocks offer a great opportunity to invest in Internet-related stocks that can generate high levels of earnings growth, but you must pay attention to the price paid and patiently wait for the right opportunity.