Reuters

(Reuters)

Why Alphabet or Wal-Mart Could Purchase eBay

By Mergers and Acquisitions Fool.com

 

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eBay (NASDAQ: EBAY) stock is firing on all cylinders lately: The e-commerce platform has gained over 35% in the last month alone on the back of accelerating growth. Interestingly, Citigroup believes that eBay stock is still attractively priced, and the e-commerce platform could be an acquisition target for bigger companies such as Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) and Wal-Mart (NYSE: WMT) in the future.

eBay is Accelerating

 

eBay is actively working to attract more customers and accelerate sales growth. Among other initiatives, management is improving the customer experience by requiring more and better product description from sellers, as well as improving internal product search capabilities and educating sellers about strategies to detect inventory gaps and new business opportunities.

Financial reports for the second quarter of 2016 indicate that growth is in fact gaining steam: Gross merchandise value during the period amounted to $20.9 billion, increasing by 4% year over year in U.S. dollars and growing 6% in constant-currency terms. In comparison, gross merchandise value grew by a slower 1% in U.S. dollars and 5% in constant currencies during the first quarter.

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StubHub and the classified ads segment have been particularly strong growth drivers for eBay lately. Revenue from StubHub grew 40% last quarter, and classifieds delivered a 15% increase in sales. These two segments still have a relatively modest impact on overall revenue, but chances are that they will continue outgrowing the rest of the business going forward, so they should gain share in the overall revenue mix over the coming years.

Considering that e-commerce is an attractive industry and that eBay is delivering accelerating growth, valuation looks fairly reasonable, if not convenient. eBay stock carries a price-to-earnings ratio around 18.7, and the price-to-cash-flow ratio is in the area of 11.8. Both metrics are slightly below average valuation levels for companies in the S&P 500 index.

Would Alphabet or Wal-Mart Place a Bid for eBay?

 

According to Citigroup analyst Mark May, eBay looks like a compelling acquisition target. May, as quoted byBarron's, sees the reduced risk profile and improving fundamentals of the company as the main reason for this possibility:

 

 

We see the recent turnaround in the business as a positive for the prospects of a potential acquisition since the management team's ability to reaccelerate growth reduces the risk of investors catching a 'falling knife.' Though an acquisition of this size would necessitate a long period of due diligence, eBay currently sits in a 'sweet spot' for an acquisition in our view. The fundamentals of the story are now improving with dry powder for upside the next few quarters, but the stock has yet to get ahead of its skis from a valuation perspective.

 

 

Alphabet and Wal-Mart are among the companies that Citigroup identifies as potential buyers, and the idea makes sense from a financial and strategic point of view. To begin with, eBay has a market capitalization value of around $35 billion, which is dwarfed by Wal-Mart's $228 billion in market capitalization and Alphabet's gargantuan market value of $508 billion. This means that both Alphabet and Wal-Mart are big enough to purchase eBay.

Alphabet is the undisputed leader in online advertising thanks to its powerful Google business. Traffic from search engines is a major driver for a company like eBay, and there are obvious synergies between e-commerce and online advertising. But an eBay acquisition from Alphabet could raise eyebrows among regulators, and potential issues with anticompetitive regulations could be a hot area to watch. Nevertheless, the deal would certainly make sense from a strategic perspective.

As for Wal-Mart, the discount retailer is facing daunting competitive pressure from Amazon and other online players. The company is aggressively investing for growth in e-commerce: Wal-Mart now offers over 10 million SKUs available on Walmart.com, and it has an online presence in 11 countries. However, e-commerce sales grew by a modest 7% last quarter, which management admits is "too slow."

Wal-Mart has enormous scale, a physical presence all over the world, and tremendous negotiating power with suppliers. Combining those strengths with eBay's customer base, brand recognition in e-commerce, and proven marketplace strategy sounds like a smart move for both companies.

Just to be completely clear, there is no indication that Alphabet or Wal-Mart are in fact going after eBay as of the time of this writing, and investors shouldn't speculate too much with these kinds of possibilities when making investing decisions.

However, the main point to consider is that eBay looks like an interesting acquisition target because of its strategic position in e-commerce, accelerating growth, and attractive valuation levels. This is quite telling about the kind of performance that eBay stock can deliver over the coming years, with or without an acquisition down the road.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fools board of directors. Andrs Cardenal owns shares of Alphabet (A shares), Alphabet (C shares), and Amazon.com. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon.com, and eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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