I’ve been thinking a lot about technology recently. It started when I had something of a ‘road to Damascus’ moment about how cloud computing could change my business. You might remember me writing about it a few months back here in The Right Side.
And this week, I’ve also been reading the new Red Hot editor, David Thornton, on cloud computing and ‘the internet of things‘. It’s fascinating stuff. And I have to agree with David, there seems to be real and explosive potential for returns from investing in technology.
Take eBay. This company has been one of the great success stories of our time. The stock just keeps climbing. In the last five years alone it has risen from around $10 to $51 today. And it could keep climbing for the next five years.
In fact I think there are ten good reasons to buy this stock:
• The biggest advantage that eBay has is its ‘first-mover’ advantage. If you’re in the online auctions business, you need eBay. Though there are plenty of specialist web auction sites, dealing in things like wines, or cars, the fact is, eBay won the first battle – it’s the go-to site for online auctions. The barriers to entry are now considerable, and it’s difficult to imagine a competitor encroaching now.
• eBay has a great business model. While Amazon gets its hands dirty, organising stock, packaging and sending it, eBay is simply a platform for other businesses; businesses that have to do all the hard work. Skimming a commission, without having to take on risk of holding stock, let alone having to deal with customers is a great boon.
• eBay has played its hand well. In fact, today it’s probably best considered as two businesses. Paypal, the online payment system, is a considerable business entity in its own right. As well as offering users certain protections for online purchases, it means users don’t have to share bank card details every time they do a deal. As well as not having to repeatedly plug in your bank card details, the system also means you don’t have to input all the boring stuff like delivery address and phone numbers, every time you want to make a purchase.
• Paypal is also moving into new and profitable areas. For instance, they’ve just launched a phone app that allows you to buy simple things like a cup of coffee using a paypal account. Ultimately, this could be a big threat to the banking and credit cards industry. There’s nothing like being at the centre of a good, old industry shake up.
• Mobile phone and tablet transactions are taking off. As more people use small gadgets to browse and buy, Paypal’s easy to use interface is becoming increasingly relevant. These devices don’t just allow for more flexibility when using the web, they’re actually increasing web use too. All of which is good for eBay.
"The only financial publication I could not be without."
John Lang, Director, Tower Hill Associates Ltd
• What was formerly known as e-commerce is gradually becoming known as just commerce. We’re losing the ‘e’. The line between online and offline is blurring. eBay wants to use its existing platform to help existing offline stores to find an online presence. And with such a squeeze on the traditional high street, I can see more and more retailers embracing the semi-online norm. eBay is in on the action.
• In fact, like bricks and mortar stores, a lot of stuff offered on eBay has now moved to a fixed-pricing model. While the auctions business is still going strong, the fact is, many buyers simply want a fixed, but discounted price. eBay is using its massive footfall to drive a whole new area of business.
• As well as fixed prices, consumers increasingly look for free delivery options, and they’re getting them. Again, this is all about ‘normalising’ online shopping. My vision of the future includes a new and improved distribution model. One where there’ll be drop off points for online purchases, in fact, these sorts of networks are already starting to appear. As postage costs continue to disappear, the popularity of eBay will continue to grow.
• While eBay may have a decent business, the key question is, is it trading at a sensible price? Well, as you might expect, it’s not cheap. At $51, the stock is trading on 19 times this year’s expected earnings. While a little rich, that’s not too bad for a growth stock. But as we look towards 2014 earnings, we find the stock trading on a very realistic 16 times earnings. That looks okay to me.
• Finally this might be a good entry point for a new investor. Here’s the chart over the last three years.
Source: Digital Look
2011 saw the stock trading in a pretty orderly range – as you can see, trading nicely between the two green lines on the chart. During 2012, the business underwent a fundamental revaluation as chief executive John Donahoe’s growth plans started to pay off. Again, the red tramlines shows a very orderly assent.
As of 2013, the stock finds itself range-bound once again. This time, $50 to $57 seems to be its comfort zone.
In fact, I think there are two potentially interesting opportunities here. For a long-term investor, you could consider the recent downturn in price as very nice entry point.
And as a trader, you may consider taking a punt at $51 (with a $49 stop loss), looking to cash in at something like $56.
I’ll be returning to the subject of technology in the coming weeks. To be honest, it’s not a sector that I’ve had a great deal of exposure to in the past. But I’m beginning to see the light.
• This article is taken from the free investment email The Right side. Sign up to The Right Side here.
Information in The Right Side is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. The Right Side is an unregulated product published by Fleet Street Publications Ltd. Fleet Street Publications Ltd is authorised and regulated by the Financial Conduct Authority. FCA No 115234. http://www.fsa.gov.uk/register/home.do
New to MoneyWeek?
Welcome, and thank you for visiting us.
Here at MoneyWeek, our aim is simple. To give you intelligent and enjoyable commentary on the most important financial stories of the week, and tell you how to profit from them.
If you've enjoyed what you've read so far, I've got something you'll definitely be interested in.
Every Monday, Wednesday and Friday, I send out our contrarian email, 'The Right Side', which cuts through market noise to deliver useful, shrewd and to the point advice straight to your inbox.
And with your permission, I'd like to send you The Right Side for FREE.
To sign-up enter your email address below.
We hope you enjoy your stay on the site.Good luck with your investments!
Editor, The Right Side