The coronavirus pandemic has broken more than one business, but some companies have benefited from it. One of the beneficiaries of the pandemic was the payment system eBay (EBAY). Millions of people, locked at home and afraid of catching the disease, have started shopping through online stores and online venues such as eBay.
However, eBay has begun to lose customers due to mass vaccinations and the global economic recovery. Despite this negative trend for the service, its securities are already up 29% this year. Although, there is no guarantee that this growth will continue and that 2022 will be as successful for eBay as 2020 and 2021. Let’s take a closer look at the company’s business, and together we’ll see if eBay shares are worth buying or if it’s worth finding a better investment.
eBay fights for every customer
In Q2 2020, 160 million buyers used the service, and by Q1 2021, that number reached 166 million. It was the tipping point for the company as the economic recovery intensified and eBay began to lose customers. According to recent reports, that number was down to 154 million at the end of 2021.
As a reminder, eBay doesn’t make sales; it’s just a place where buyers and sellers meet to make a transaction. For this mediation, the issuer takes a percentage of each transaction. The value of these transactions (gross merchandise value) has declined in recent months as the payments service lost millions of customers. Over the year, this figure fell to $19.4 billion from $21.7 billion.
Previously, the company sent its loyal customers a certain cashback on the total amount of purchases each month. For many customers, it was an incentive to reuse the service. At the end of 2021, management canceled that bonus, causing sales and marketing expenses to drop. Many experts attribute the outflow of customers to this innovation as well.
To compensate for the outflow of customers, eBay has decided to change its approach to them and focus on more valuable customers. Whether or not this policy will be successful remains to be seen.
Customers are expected back
From Q2 2020 to Q3 2021, eBay increased its transaction rate from 9.2% to 12.1%, driving an 11% year-over-year increase in revenue. And it’s all thanks to increased demand during the pandemic.
But the pandemic has also led to another trend: a problem with the supply chain worldwide. It has caused a sharp decline in the number of products on store shelves, and we are not talking about food, but imported goods, such as spare parts for appliances or jewelry and perfume.
It became a kind of tailwind for the company, as people found what they needed on the platform. The thing they need is likely to cost more, but people understand that they won’t buy what they need elsewhere. Thus, supply chain problems during the holiday season of late 2021 helped eBay increase the gross value of the merchandise.
The online auction management has done an excellent job of improving profitability: for the past ten years, the company’s pre-tax profitability has averaged 28.3%. Meanwhile, eBay continues to have problems with revenue, which grew at a compound annual rate of only 1.2 percent over the same period.
On the downside, eBay has been slow to change and innovate on its website. The eBay website is essentially the same as it was in 2010. Putting an item up for sale is still a slow and tedious process.
At the same time, this paper is not expensive and trades at a price to free cash flow ratio of 17. Stable earnings, inexpensive valuations, and a business model with minimal assets make up for the lack of innovation and make eBay stock an attractive purchase for at least 2022.
Let’s look at the technical picture. The paper is trying to stop the fall, which has been going on for the fourth month. Currently, the asset is near $60, and it is testing the strength of this level. But we would recommend waiting until the price passes the $70 level and stays above it. At the moment, the asset is near $60, and it is testing the strength of this obstacle. But we would recommend waiting until the price passes the $70 level and stays above it.
Over the past ten years, cloud services and software-as-a-service have become widespread. And a lot of companies are now dependent on external resources outside their data centers.
Another change in global business has been remote working. It is a trend that has gained popularity over the pandemic years. Being at home, many employees need access to corporate resources. There are hundreds of billions of dollars in IT, and of course, such a tidbit of money could not go unnoticed by criminals. Businesses need a reliable watchdog to protect their resources, and that watchdog is Zscaler.
Zscaler (ZS) provides network services and cloud cybersecurity. The company’s platform, Secure Access Service Edge (SASE), consists of 150 data centers worldwide.
The company does not work with legacy technologies connected to local networks but through cloud systems, which provides better performance and the more effective recognition of cyber threats. This approach has become a monolithic argument against competitors.
Research and consulting firm Gartner believes that Zscaler has rightfully been a leader in its industry for the past ten years, which is not surprising given the company’s reach. This cloud-based service provides Internet security, web security firewalls, performs SSL verification, and develops anti-viruses. The company will find vulnerabilities in the communications system and put them under control, as well as monitor user activity in the cloud resources, as well as mobile and Internet environment.
The issuer has more than 4,000 customers, including more than 400 from the Forbes Global 2000. The company’s addressable market exceeds $72 billion, and that number will only grow as the issuer continues to expand its target market.
Features of the business model
Zscaler uses a zero-trust model and is the leader in this segment. The model is widely used for cybersecurity, especially when employees work remotely. The company’s leading position is held by its developments. Zscaler has a total of 275 issued and pending patents. Thanks to the company’s security systems, its customers can conduct business from anywhere in the world without fear.
Despite its significant volume, Zscaler performs admirably. In addition, its security systems’ detection of a large number of threats allows them to improve, making Zscaler’s protection attractive to customers.
Other advantages of Zscaler
ZS business will grow in the long run, thanks to healthy market conditions, WFA, regulatory specifics, and the fact that enterprise customers are migrating to the cloud space.
Besides, the Zscaler platform is scalable and allows you to collaborate with existing customers and acquire new ones. It is very popular with enterprise customers, which gives Zscaler a head start over companies with legacy cybersecurity solutions and allows it to gradually push them out of the market. The growing number of enterprise customers moving to the cloud will help increase Zscaler’s market share.
The company’s growth will also be aided by the developing infrastructure of next-generation 5G networks, as well as new solutions in the segment of cloud security and WFA.
The introduction of solutions such as the Zscaler Digital Experience and Zscaler Cloud Protection, designed to ensure security in the cloud, will contribute to Zscaler’s financial performance in the medium term.
Finances are in order
Zscaler’s revenue is growing at an incredible rate. In 2021, the company’s total revenue came in at $673 million. That growth rate continued into the first quarter of the fiscal year 2022. Zscaler’s revenue last fiscal year was 56% higher than in 2020, and in Q1 2022, it was already 62% higher than in the same period in 2021. With such steady growth, it’s hard to believe that anything can slow it down.
About half of the income comes from international markets. It is a huge advantage for the company. For example, CrowdStrike (CRWD), a competitor of Zscaler, had 73% of its total revenue last quarter in the domestic market. Well-balanced revenue sources mean less risk and more opportunity for growth.
Zscaler reports non-GAAP gross margins of 81% and GAAP gross margins of 78% for the fiscal year 2021. That said, the issuer is not yet profitable under GAAP, as the lion’s share of revenue goes to sales and marketing.
The company’s cash flow is stable. The company generated more than $200 million in 2021, while it generated $79 million in 2020.
The company’s customer loyalty index (NPS) is 74. For reference, it’s not bad when the NPS is over 50, and when that index is over 70, it’s excellent. So the company has a good relationship with its customers, and we believe that this will affect its financial results.
ZS is projected to have revenue growth averaging 38.3% over the next three years. The company is also expected to maintain high adjusted EBITDA margins going forward.
Nevertheless, ZS stock is traded at a significant premium compared to its peers. The EV/NTM Revenue multiple is 40.9x, which is much higher than the 16x average that is normal for similar companies.
We think the current price on this paper is acceptable to buy. The sellers left the market just recently, and the buyers are trying to recoup all their losses. From the local low of around $220, the asset has already risen to $285. Breaking through the $290-$300 zone and fixing above it will allow the bulls to return to the $330-$350 area. Their next target will be the resistance area of $390.
Last week’s quarterly reports
DoorDash last week reported Q4 2021 revenue growth to $1.32 billion, against expectations of $1.28 billion.
The company noted a 36% increase in the gross value of orders received by the service. The index reached $11.2 billion, while analysts had expected growth of $10.6 billion. The orders exceeded 369 million, while analysts forecasted 361 million. The “fly in the ointment” was earnings per share, which were around $0.45, while the forecast was $0.25.
It seems that the decline of DoorDash shares has stopped, and the paper has started to make the first steps towards growth. Let’s be patient and wait for further development of the uptrend. If the price fixes above the $130-$140 zone, we will start thinking about buying.
Nvidia also reported its success in Q4. The report figures exceeded the forecasts. Nevertheless, the company’s securities went down.
The issuer’s revenue for the earnings period increased 53% year on year, reaching $7.64 billion. The revenue for the entire fiscal year was $26.91 billion.
Nvidia’s major divisions reported record sales, both for the quarter and for the year.
Why did chipmaker’s paper fall after such strong numbers?
Most likely, investors were frustrated by the fact that for all the success and growth of indicators, the gross margin remained unchanged. The failure of the ARM deal will also hurt Nvidia’s bottom line, and the company will have an additional expense of about $1.4 billion in Q1 2022.
Buyers continue to believe in the company’s stock and are working hard to bring it back up. If the price rises above the $270 level and stays above it, we should expect the asset to rise towards $320.