Why eBay Inc Is Too Risky Right Now

Before you go, we thought you'd like these...
Before you go close icon

E-commerce giant eBay has suddenly found itself in trouble. eBay is a profitable company with a strong brand, but its future outlook has become clouded. It recently revealed a significant security breach that could potentially impact millions of its users. And, the stock holds a fairly lofty valuation, meaning the path of least resistance over the coming months might be lower.

Source: Wikimedia Commons

That's why investors looking for a stock in the e-commerce space should consider Overstock.com instead. Both eBay and Overstock.com are growing their businesses, but Overstock.com simply doesn't have the same level of risk as eBay right now.

Security breach front and center
On May 21, eBay revealed that hackers stole a slew of personal information from users, including email addresses, birthdays, and other identity information earlier this year. Importantly, the company believes users' financial information was not taken, because that data is stored separately from personal information. Unfortunately, eBay estimates a large number of its 145 million active users were potentially affected.

This is just the latest episode of companies with sizable online sales to be hacked. Recall that Target went through a similar situation several months ago, and the results have been tough to warch. Target has suffered at least some damage to its brand, evidenced by the fact that its profits fell double-digits in the most recent quarter.

The major implication for eBay is the potential financial fallout from this, which will be difficult to estimate just yet. It's not readily clear whether any money was stolen, but it's likely eBay will incur some financial costs associated with the hacking, as well as a potential loss of customer loyalty.

eBay's shares barely budged after the announcement, but it's hard to imagine this situation playing out in any way but negatively for the company. And, as we know all too well, the market hates uncertainty. The longer this lingers over eBay's head, the worse off the stock will be.

Overstock.com is a better opportunity
To be sure, eBay is a very successful company. It produced 14% revenue growth and 11% growth in adjusted earnings per share in the first quarter. This came on top of a good performance last year, in which the company racked up 14% revenue growth and 15% diluted EPS growth.

And yet, eBay's share price has been stuck in the mud for the better part of the past year. The reason is that the stock is pretty fairly valued by most metrics. It's trading for trailing and forward price-to-earnings multiples of approximately 20 and 17.5, respectively. It's not a screaming bargain, and things might get worse, especially considering the possible financial costs associated with its security breach.

That's why Overstock.com represents a more compelling opportunity. It's growing too, without the threat of a massive security breach hanging over its head. Overstock.com grew revenue and gross profit by 9% in the first quarter. And, like eBay, Overstock.com had a solid year in 2013 as well. The company grew revenue by 19% and net income by 7.5%, excluding a one-time gain from a deferred tax asset valuation.

From a valuation perspective, there seems to be little that separates eBay and Overstock.com. They are similarly valued. Overstock.com also holds a forward earnings multiple of 17, but its risk profile isn't fraught with as many potential red flags as eBay. That's why it seems likely eBay's valuation multiple is headed lower, not higher.

Questionable outlook for eBay
eBay is growing revenue and profits at solid rates, but not strongly enough to justify a significantly higher multiple. This is especially true given that the hacking situation could very well get worse going forward. On the other hand, Overstock.com is a profitable company in the e-commerce industry too, without the same level of risk as eBay right now. It's a better opportunity for investors interested in that space.

As a result, while eBay is undoubtedly a highly profitable company with a strong brand, its stock doesn't look like a compelling opportunity right now. That's why Foolish investors would be wise to wait for a further pullback before jumping in.

Your credit card may soon be completely worthless
The plastic in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.

The article Why eBay Inc Is Too Risky Right Now originally appeared on Fool.com.

Bob Ciura has no position in any stocks mentioned. The Motley Fool recommends eBay. The Motley Fool owns shares of 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.

Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

People are Reading