A New Take on an Old Favorite

Cramer sees a real bargain in eBay under $34, where it is right now. He’s been bullish on eBay for months, but he’s now reevaluating the company from a new perspective – one that has seemed to slip by Wall Street and the 20 analysts that cover the company.

Most analysts are looking at eBay in the wrong way, Cramer said, and once they change their uniform view of the company it should lead to upgrades and higher prices. It seems like those who cover eBay fret and obsess over the listings in its auction business, Cramer said, while overlooking the fact that auction listings are becoming less important to the company’s performance. eBay is a company that’s taking active steps to change what it is levered to, and for the most part Cramer doesn’t think people are paying attention.

The key issue is advertising. When you think of a stock that’s benefiting from ad dollars moving out of television and print and onto the web, you probably think of a name like Google . That view is becoming increasingly wrong, Cramer said. With eBay, online advertisements are a better business than its listings and that’s going to take the stock higher, he said.

The company has been making a conscious effort to clean up its site by taking down low-quality listings, which should increase the percentage of unique visitors who bid on listed items. That will increase average sale prices because eBay takes a cut every time something is sold. But even though the listings are improving, they fell 6% year-over-year last quarter at the same time sales from the marketplace business were up 26% and earnings were up 50%. This tells Cramer that auctions are starting to matter less. And that’s without even mentioning PayPal, which eBay owns and Cramer considers the online analogue to Mastercard , his favorite play on plastic.

You need to look at eBay as a long-term investment because, while the company is changing, it’s happening fast, Cramer said. Next year analysts expect eBay to learn $1.60 of earnings per share. One estimate is that online advertising will only make up 6 cents of earnings per share. But if you look to the future, in 2012 the expectation is that ad sales will bring in 32 cents of earnings per share – coming in at around 10% of eBay’s earnings. That’s what you should be looking for, Cramer said – the profitable transition.

As more people understand that eBay isn’t just an auction house but also an advertising company and a digitalization of commerce play, the higher Cramer thinks the stock will go. That is the biggest positive here, Cramer said, but there are others, including eBay’s ratcheting up of its classified business both domestically and internationally. And although Cramer was never a huge fan of eBay’s $2.6 billion acquisition of Skype, although he appreciates that Skype is growing registered users and sales at a pretty fast clip.

Bottom Line: eBay is tapping into the online ad market for more and more of its revenues and it’s a better business than auction listings, Cramer said. Along with PayPal, it should take the stock higher.


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