2 Out Of Favor E-Commerce Stocks This Analyst Is Buying

• eBay Inc EBAY shares are down 52 percent in the last six months, while shares of Shutterfly, Inc. SFLY have declined 6 percent in the same period.
• Axiom’s Victor Anthony maintained a Buy rating on the companies, with price targets of $34 for eBay and $52 for Shutterfly.
• Anthony believes that the stocks of these two companies will drive shareholder returns over the coming year.

Analyst Victor Anthony mentioned that Buy-rated internet companies like Alphabet Inc GOOGL, Amazon.com, Inc. AMZN, Facebook Inc FB and to some extent Alibaba Group Holding Ltd BABA are in the early innings of consolidating retail, advertising and cloud computing.

These companies are poised to benefit from the traditional formals in terms of enhanced cash flows and equity values in the near future, Anthony said, while adding that eBay and Shutterfly are expected to drive robust shareholder returns over the coming years.

eBay: An Attractive Earnings Growth Story

The company’s 3Q15 results depicted a stable core business, with pockets of strength at StubHub and Classifieds business. eBay is expected to beat its revenue growth guidance of 0-5 percent for 2016.

The company’s overall operating margins are likely to expand as its operations in India, Mexico, Turkey and the South East continue to grow and turn profitable, Anthony mentioned.

Fixed Price B2C is growing near market rates and although the C2C segment is growing at a slower pace, it has higher margins and attractive cash flow dynamics, the analyst stated. Although the company’s active buyers increased by 2 million in 3Q, it faces major headwinds from SEO.

eBay used its free cash flows to repurchase nearly 22 million shares for $600 million in 3Q. The company’s balance sheet, with $10.1 billion in cash and equity investments, is under-levered. Anthony added that the company is unlikely to pay a recurring dividend to preserve its flexibility, but may reconsider the same after 2016.

Shutterfly: Margins Set To Expand And FCF To Grow In 2016

Shutterfly’s stock has underperformed over the past year due to concerns relating to core growth and spending as well as a heated proxy war.

“However, we believe that the Shutterfly brand is growing in the double digits, SFLY is lapping the spending cycle starting in 4Q15, and margins are set to expand and free cash flow per share to grow in 2016,” Anthony wrote.

The company is likely to lap $12-14 million of costs in 2016 from nonrecurring restructuring costs related to platform consolidation, proxy costs, facility closures and consolidations, and brand shutdowns in 2015. The analyst expects Shutterfly’s margins to recover to the 20 percent range in 2016 even as its lower margin Enterprise business continues to grow.

Anthony believes that Shutterfly’s willingness to address the compensation issue could ward off another proxy war. The company’s sound fundamentals could lead to the resurfacing of acquisition interest.