Can eBay Stock Really Rise 25%? This Analyst Thinks So.

By Markets

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Image source: eBay.

eBay (NASDAQ: EBAY) stock is doing remarkably well. Shares of the e-commerce platform have gained more than 25% in the past 12 months. Even more interesting, eBay still has substantial room for appreciation, at least according to a recent research report from Deutsche Bank, which calls eBay "the best story in Internet heading into 2017," and has a price target of $40 per share for the company.

Deutsche Bank analyst Ross Sandler upgraded eBay from a "hold" to a "buy" recommendation, raising his price target for the company from $30 to $40 per share. As of this writing, eBay stock is trading in the neighborhood of $32 per share, so the price target implies an upside potential of nearly 25% from current price levels.

The main idea behind the recommendation is straightforward: eBay is implementing different initiatives to accelerate growth, and performance seems to be improving lately. In addition, the stock is still very reasonably priced, so eBay stock offers substantial room for gains. According to the research note, "there are few out-of-favor accelerating-growth stories with upside to estimates and a reasonably low valuation, from that perspective [eBay stock] might be the best story in Internet heading into 2017."

It's of the utmost importance to fully understand the rationale behind an investment decision, so investors should always do their own homework, as opposed to blindly following recommendations from Wall Street. Nevertheless, we can still gain valuable insights by listening to what analysts have to say about an investment.

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eBay is gaining momentum

The e-commerce industry is fertile ground for growth, but eBay has operated considerably below its potential over the past several years. One of the main reasons is that the company faces daunting competitive pressure from (NASDAQ: AMZN), as the online retail juggernaut captures most of the growth opportunities in in the industry.

Based on financial reports for the second quarter of 2016, Amazon produced $30.4 billion in revenue during the period, a staggering 31% year-over-year increase. By comparison, eBay generated a much smaller $2.2 billion in sales, growing 6% versus the second quarter of 2015.

However, even if eBay is no match to Amazon in terms of size and growth, the company is still delivering accelerating performance. Gross merchandise volume was $20.9 billion last quarter, representing a 4% increase in U.S. dollars and 6% growth in constant currency terms. This growth represents a significant improvement over an annual increase of only 1% in U.S.-dollar gross merchandise volume during the first quarter of the year.

Management is implementing multiple initiatives to better capitalize on growth opportunities in e-commerce. Among other moves, eBay is investing in new technologies to organize, catalog, curate, and present inventory, which is ultimately driving a superior customer experience and increasing transactions on the marketplace. Similarly, the company is working with machine learning to improve product browsing and personalization.

While many brick-and-mortrar retailers see Amazon as a dreaded competitor, eBay is taking a different role, offering a bridge for traditional retailers to join the e-commerce revolution through a proven and well-established platform.

The company still has significant room for improvement, but recent moves from management seem well intended, and the business is gaining momentum.

eBay stock is attractively priced

Wall Street analysts are on average expecting eBay to make $2.11 in earnings per share in 2016. Under this assumption, the stock would be trading at a forward price-to-earnings ratio of 15.3 times forecast earnings. That number is a significant discount versus the average company in the S&P 500 index, which trades at a forward price-to-earnings ratio in the neighborhood of 19.1.

The $40 price target from Deutsche Bank would put eBay at a forward price-to-earnings ratio in the area of 19, roughly in line with the average stock in the market. Considering that the company is one of the main players in the attractive e-commerce industry, and that recent growth initiatives seem to be generating results, this valuation wouldn't be excessive at all.

Stock prices are practically impossible to predict in the short term, as they depend on a multiplicity of factors, related not only to the company's fundamentals, but also to general market action and investor sentiment. For this reason, only time will tell for certain if eBay stock can reach $40 per share in the coming months.

That being said, eBay is delivering improving performance, and the stock is priced at fairly moderate levels. This situation bodes well for investors in the company going forward.

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Andrs Cardenal owns shares of The Motley Fool owns shares of and recommends 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.