eBay Boyar Research, And Investing in Companies with Significant Hidden AssetsVW Staff
eBay Inc (NASDAQ:EBAY) (“EBAY” or the “Company”) owns a leading global online marketplace (eBay.com) and the world’s most popular online payment processor (PayPal) that collectively enabled greater than $200 billion in commerce volume in 2013. One of the few success stories from the late-1990s technology bubble, eBay has grown revenues at a 12.4% CAGR over the past 10 years in its Marketplaces segment to $8.3 billion in 2013 and at a 25.2% CAGR at PayPal to $6.6 billion. Both businesses sport attractive high margin, fee-based revenue models, which has led to adjusted EPS increasing at a 17.7% CAGR over the past 10 years to $2.71 in 2013. However, eBay shares are roughly flat over the past 12 months and down 15% from early 2014 highs due to a confluence of negative headlines including a security breach at eBay.com, a failed campaign for a split-up by an activist investor (Carl Icahn), and a recently reduced 2014-2015 outlook by eBay management.
In our view, these recent headwinds should not derail eBay’s long-term opportunities and are more than reflected in the current valuation. Global ecommerce volume is projected to increase at a 15%-plus CAGR for the foreseeable future, and despite the competitiveness of ecommerce, we believe eBay.com maintains lasting advantages given its sheer scale and global reach. We also prefer eBay Inc (NASDAQ:EBAY) ’s marketplace model versus Amazon.com, Inc. (NASDAQ:AMZN)’s fulfillment model, given the operating margin differential (40% Marketplaces margin vs. ~1% at Amazon) and low inventory risk/capital requirements. PayPal already touches nearly 20% of ecommerce transactions and should benefit from the same tailwinds, with additional upside should mobile payment growth and retail acceptance gains enable PayPal to make deeper incursions into the traditional retail payments business. Even if eBay’s historical growth decelerates more than currently projected, the Company should still grow the top and bottom lines at or very close to double-digit annual rates.
In our view, these factors are no longer reflected in eBay’s current valuation. At only 10x forward EBITDA and less than 17x 2014E adjusted EPS, eBay trades at a large discount to both its historical average range and its ecommerce and payments peers. Utilizing a sum-of-the-parts valuation with relatively conservative projections and still-discounted multiples (10x Marketplaces and 14x Payments) to 2016E EBITDA, our forward-looking estimate of eBay’s intrinsic value is approximately $80 per share. If the current discount persists, we believe eBay’s management could come under renewed pressure to separate the valuable PayPal division from eBay.
A spinoff would give PayPal the currency to incentivize management, attract new talent and pursue attractive M&A opportunities, and PayPal would likely command a premium multiple as an independent company given its dominance in the electronic payments market. Alternatively, should a separation fail to materialize over the next 2-3 years, eBay is well positioned to return capital to shareholders en masse. The Company possesses a growing free cash flow stream (7% free cash flow yield ex-net cash) and an overcapitalized balance sheet ($7 per share in net cash) and recently increased its share repurchase authorization by $5 billion while repurchasing $1.8 billion (2% of shares at <$55/share) in 1Q 2014 alone.
eBay: Business Overview
eBay Inc (NASDAQ:EBAY) operates one of the world’s leading online marketplaces (eBay.com) and online payments platforms (PayPal), producing $16.0 billion in net revenues off of $205 billion in total enabled commerce volume (ECV) in 2013, excluding motor vehicle and real estate gross merchandise volume (GMV). eBay has a global footprint, with $8.3 billion or 52% of revenues generated outside the U.S. in 2013. eBay reports financial results in three business segments: Marketplaces, Payments, and Enterprise, as detailed below.
eBay’s Marketplaces (52% of revenues)
eBay Inc (NASDAQ:EBAY) reported 128 million active users and 550 million listings globally in its Marketplaces segment as of year-end 2013, which makes its a top-3 global online marketplace. eBay’s Marketplaces segment primarily consists of the flagship eBay.com ecommerce platform and its localized sister sites, most prominently in Germany (eBay.de) and the U.K. (eBay.co.uk). According to Alexa, eBay.com is the #7 ranked website in the U.S. and a top-ten website in several international locales. The Marketplaces segment also includes other online shopping properties such as Half.com, GittiGidiyor (a 93% owned Turkish online marketplace), the StubHub secondary ticket marketplace (est. $300 million or greater annual revenue), classified services websites including brands4friends.com and Shopping.com, and an advertising services business. eBay also owns a minority stake in Craigslist, although it that has produced more in legal fees than equity income over the years.
See full eBay Boyar Research in PDF format here.