Since you came here looking for value stocks, I will try not to waste your time with investment opportunities simply at the edge of value. On the contrary, I believe that the online market eBay (EBAY -3.25%) and furniture company Lovebag (TO LIKE -2.87%) are downright cheap right now, and the numbers back it up.
I also thought of a furniture store HRcar dealer Advanced auto partsand OLED technology company Universal Display Company for this article. However, while I think these also offer good value, eBay and Lovesac both trade for less than $100 per share, while the others don’t.
Here’s why eBay and Lovesac are great value buys with these Benjamins.
1. eBay: $46.60 per share
eBay isn’t a one-stop-shop for everything, and it probably never will be. But it’s still a very relevant platform, excelling in a number of key categories. Management calls them “targeted” categories. For a perspective on its relevance, eBay is over $76 billion in gross merchandise volume (GMV) over the last 12 months – the sales value of the products sold on the platform.
eBay management intends to maintain its relevance by doubling the expectations of its buyers. For example, eBay is quite the auto parts retailer and lately has been building its presence in this market by sponsoring related events and trade shows. It also acquired a company called myFitment to improve listings on the eBay platform, ensuring that vehicle parts information is uploaded correctly.
Collectibles is another example of a targeted category on eBay. This category includes trading cards. And trading card sales volume has more than doubled for eBay since 2019. The company is enhancing its offerings with the launch of eBay Vault, a service for high-value collectibles that makes it easier to store, authenticate and the exchange of these objects. It also recently acquired trading card market TCGplayer.
I believe eBay will remain a strong player in its core categories for the foreseeable future. And by facilitating these transactions for third parties, the company enjoys high profit margins – its gross margin is nearly 73% year-to-date.
A quick note on value stocks – a cheap valuation is often indicative of market pessimism. In the case of eBay, its active buyers fell 11% year-over-year in the third quarter of 2022 to 135 million, and GMV also fell 11% to $17.7 billion. This leads some to believe that eBay’s business is dying. But as already pointed out, it remains strong in the core categories, and I expect that to continue.
eBay has earned around $2.5 billion in operating revenue over the past 12 months – its market capitalization is only 10 times that, which is inexpensive.
Management is buying back shares and rapidly increasing its dividend, as shown in the chart below – two priorities going forward that can generate above-market returns for shareholders. Therefore, he does not need to increase his income to return more capital to the shareholders, he just has to hold on. And I believe that will be a likely outcome for eBay.
2. Lovesac: $27.69 per share
As already mentioned, value stocks generally cook in pessimism. This is the case with Lovesac stocks, and for good reason. The company sells high-quality but high-priced ottomans and sectional sofas. And this activity does not provide the company with recurring income.
To be fair, eBay revenue is also not recurring. But its users are much more likely to make multiple purchases in a year than Lovesac customers. After all, you can only buy a limited number of sofas for your home.
To its credit, Lovesac’s revenue growth is incredible. In fiscal 2022 (ending Jan. 30), its revenue jumped 55% from fiscal 2021. And in the first two quarters of fiscal 2023, the company generated a net revenue of $278 million, up 50% from the same period in fiscal 2022. The growth is impressive – but therein lies the risk.
Investors wonder if Lovesac’s sensational growth is sustainable. Management also seems to question it. In its most recent conference call, management said “we are not providing formal guidance” as it sees a wide “range of potential outcomes”. It is difficult to predict the evolution of high-end furniture sales in the context of an economic slowdown and high inflation.
Lovesac stock has already jumped 38% from its recent low, but is still very cheap. The company posted net income of $44.4 million in the last 12 months and has a market capitalization of $419 million. This means that its price/earnings ratio (P/E) is less than 10.
For comparison, the average P/E of the S&P500 is currently around 20 – So Lovesac’s valuation is around half that of the market average.
The good news for Lovesac is that it estimates that it has achieved only 2% market share, at most. Therefore, it could double its sales and retain a small share of the market, which makes the possibility feasible.
Additionally, management has roughly doubled its available inventory over the past year in anticipation of future demand. But Lovesac’s merchandise doesn’t change much from year to year. Therefore, even if the sales slow down in the short term, he can patiently hold the commodity and later sell at a high price when demand rebounds.
For these reasons, I view Lovesac as a low risk opportunity even if sales weaken over the next few quarters.
Of these two stocks, eBay is the one I would buy today. Investing – even value investing – is always about thinking long term. I have nothing against Lovesac and would even consider buying it at some point. But I’m much less confident right now about Lovesac’s stamina.
On the other hand, having been around for over 20 years, I strongly believe that eBay has done enough to stay alive at least through this decade, generating strong cash flow and rewarding shareholders along the way.