Why You Need To Look At This Factor Before Buying eBay Inc (NASDAQ:EBAY)

If you are a shareholder in eBay Inc’s (NASDAQ:EBAY), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. There are two types of risks that affect the market value of a listed company such as EBAY. The first risk to think about is company-specific, which can be diversified away by investing in other companies in order to lower your exposure to one particular stock. The second type is market risk, one that you cannot diversify away, since it arises from macroeconomic factors which directly affects all the stocks in the market.

Different characteristics of a stock expose it to various levels of market risk. A popular measure of market risk for a stock is its beta, and the market as a whole represents a beta value of one. Any stock with a beta of greater than one is considered more volatile than the market, and those with a beta less than one is generally less volatile.

What does EBAY's beta value mean?

eBay has a beta of 1.05, which means that the percentage change in its stock value will be higher than the entire market in times of booms and busts. A high level of beta means investors face higher risk associated with potential gains and losses driven by market movements. Based on this beta value, EBAY will help diversify your portfolio, if it currently comprises of low-beta stocks. This will be beneficial for portfolio returns, in particular, when current market sentiment is positive.

How does EBAY's size and industry impact its risk?

A market capitalisation of US$42.97B puts EBAY in the basket of established companies, which is not a guarantee of low relative risk, though they do tend to experience a lower level of relative risk compared to smaller entities. But, EBAY’s industry, internet, is considered to be cyclical, which means it is more volatile than the market over the economic cycle. As a result, we should expect a low beta for the large-cap nature of EBAY but a higher beta for the internet industry. It seems as though there is an inconsistency in risks from EBAY’s size and industry. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.

How EBAY's assets could affect its beta

An asset-heavy company tends to have a higher beta because the risk associated with running fixed assets during a downturn is highly expensive. I test EBAY’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Considering fixed assets account for less than a third of the company's overall assets, EBAY seems to have a smaller dependency on fixed costs to generate revenue. Thus, we can expect EBAY to be more stable in the face of market movements, relative to its peers of similar size but with a higher portion of fixed assets on their books. However, this is the opposite to what EBAY’s actual beta value suggests, which is higher stock volatility relative to the market.

What this means for you:

You could benefit from higher returns during times of economic growth by holding onto EBAY. Its low fixed cost also means that, in terms of operating leverage, it is relatively flexible during times of economic downturns. What I have not mentioned in my article here are important company-specific fundamentals such as eBay’s financial health and performance track record. I urge you to complete your research by taking a look at the following:

1. Future Outlook: What are well-informed industry analysts predicting for EBAY’s future growth? Take a look at our free research report of analyst consensus for EBAY’s outlook.
2. Past Track Record: Has EBAY been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of EBAY's historicals for more clarity.
3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.