EBay (EBAY) Shares Head Lower After Apple Pay Debuts

by Ryan Fitzwater, Director of Research, The Oxford Club
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EBay (Nasdaq: EBAY) was down as much as 2.5% yesterday and is down an additional 3.5% today. It is all thanks to concerns around increased competition from Apple’s (Nasdaq: AAPL) new payment system, Apple Pay.

So what is Apple Pay?

If you ask eBay, it is the new direct competitor to its PayPal business.

Apple Pay is a new “virtual wallet” payment system that will be available on Apple’s new Apple Watch, iPhone 6 and iPhone 6 Plus (the oversized screen version). Apple Pay uses NFC (near field communication) technology that allows for wireless payment transactions right from your phone.

New Security Features

The tech world is buzzing about Apple’s new payment system because payments can only be authorized by fingerprint.

With increased security concerns after the iCloud breach that sent risqué photos of celebrities out to the Internet world, Apple was surely happy to unveil a new security element to the masses.

Along with fingerprint identification, Apple Pay uses a unique Device Account Number (what they call a token) to authorize transactions. So for each transaction you need a customer’s fingerprint, the authorized token and a one-time dynamic security code.

The new verification system sounds much more robust than our current methods, but only time will tell if this is a more secure process. Hackers will surely be testing its merits.

All Partnered Up

Apple has already partnered with American Express (NYSE: AXP), MasterCard (NYSE: MA), Visa (NYSE: V) and most of the big banks, meaning Apple Pay will be available at over 200,000 stores right out of the gate. And it will also allow customers to process transactions online, right from retailer websites. This is why eBay is sweating.

Right now PayPal is more of an online-based payment system, but everyone has been eyeing the potential growth in offline and mobile purchases.

Google Wallet is one mobile-based system that has yet to really take off. Many now believe Apple Pay will be the one platform to break out and finally get consumers to use their phones to make purchases instead of their physical wallets. The success of iTunes revolutionizing online music purchasing last decade surely suggests they could do it again with mobile payments.

Many Wall Street analysts downgraded eBay immediately following Apple’s announcement. And a downgrade due to increased competition from Apple Pay might be worthy. But we wanted to see for ourselves. So we ran eBay through our Investment U Fundamental Factor Test to get our own rating on the stock:

 

Earnings-per-Share (EPS) Growth: EBay saw a 10.2% bump in EPS in the last quarter. Double-digit growth is always welcome.

Price-to-Earnings (P/E) Ratio: Things get a little complicated here. In the first quarter of this year, eBay took a net loss due to a one-time discrete tax charge of $3 billion. This was due to last year’s foreign earnings being taxed; they were previously not subject to U.S. taxes. This caused basic earnings over the last 12 months to come in at -$0.11. On an adjusted basis, they come in at $2.21. We will err on the side of caution here. Since we cannot gauge P/E without positive earnings (normally we use basic earnings to gauge P/E due to the fact they have less chance of being manipulated), it does not get a positive mark here.

Debt-to-Equity EBay’s debt-to-equity of 28.05% is almost four times smaller than the industry average that clocks in at 107.60%. This is what we like to see.

Free Cash Flow Per Share Growth: Another positive mark here. EBay saw a 91.94% increase in cash flow last quarter.

Profit Margins EBay is clearly struggling here. Over the last 12 months, its profit margins have hit -0.65%. Negative profit margins are a bad sign. Add in the fact that the industry is averaging positive margins of 2.9%, and we clearly need to mark it down here.

 Return on Equity We have ourselves another concerning metric. EBay’s ROE is also negative, coming in at -0.55%. The industry is averaging a healthy 18.53%. Management needs to work harder to turn this around as well.

*Why did we look at these specific metrics? Find out more here.

Fundamental Factor Test Score

C: Hold (Hits just three key metrics)

Please note that our fundamental factor checklist is just the first step in performing your own due diligence. There are many other factors you should consider before investing. That's why The Oxford Club offers over a dozen newsletters and trading advisories all aimed at helping investors grow and maintain their wealth. For more details, click here.

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