eBay: Stock Fully Valued at Current Price

I thought that eBay (EBAY) may be a good play on frugality in 2009. The stock is off 53% this year. It is trading at historically low PE and similar relative value metrics, has lots of cash and no long term debt.

The company did draw down a billion dollars from a revolver for thepurchase of Bill Me Later in October, but this should not be an issue to repay. The revolver matures at the end of 2012 and the company has lots of cash and also generates lots of cash.

eBay has been a large growth company for some years. From 1998 through 2005, eBay traded at anywhere between 1500 and 50x earnings, 33.8 in '06, 28.4 in '07 and now a meager 9.3x this year's expected $1.56 per share. We are three quarters into 2008 earnings and have tallied 1.17 per share in the first 3 quarters. We should be able to hit the required .397 in Q4. Such a figure would still be lower than quarters two and three and two pennies lower than last year.

This year, eBay has a broader product offering including Skype, better integrated PayPal, Stub Hub and Bill me Later, among others.

These offerings, along with an ~ 35% increase in listings, will have to offset the 10% decrease in YoY unique visitors to the auction site and a whopping 25% decrease in total traffic. This is the main problem - a fundamental issue relating to its operations, its appeal and its model in the future.

2008 was actually the first year that other auction sites finally were able to attract buyers. Some revolt among the old-guard of eBay sellers vis a vis new policies on eBay (new listing fee structure, new rules about shipping fees and new seller rating systems) and disenchantment with new CEO John Donahoe contributed to the fundamental ops problems as well.

A sum-of-parts valuation may imply eBay is selling for about what it is worth - applying a 1B valuation to Skype, 7x Ebitda for the marketing business (growing at a 10% clip) and 8x for the payments business (growing at a 25% clip) leaves about 5x for the marketplace. (7 x 788 * 55% = 3.05B) + (8x 1836 *33% = 605M) + (5 x 4,838 *44% = 10.64B) + Skype = Total of 15.24B

eBay has net cash of about 3.3B for an EV of (18,719-3,300) 15.4 B.

I believe that while this may seem to be a compelling value in times of expanded multiples and risk taking, right now, with eBay's main marketplace business growth slowing to a near halt, with fundamentals, in my opinion, impaired, I think eBay is fully valued right here at 14.

Disclosure: no positions

Comments

[redbaron:]

Well reasoned, and perhaps the correct position.

I however, still consider eBay a short. My logic is biased, due to my thoughts on managements recent decisions, but it is strengthened by decisions such as spending additional funds on the purchase of BillMeLater. How management thinks they can make money on BillMeLater, when the credit card companies are tightening credit terms due to non-payments, is besides me.

Ebay cannot succede when they are treating their long-time customer base sellers in the manner they consistently are now doing. These customers will continue to leave them, over time, for other selling options, and without a change in either management, strategy, or both, I can see only long term negative growth for the company. Sellers are the only players actually paying eBay and PayPal fees, and hence, they are the customers, IMHO.

Disclosure: long term short.

Jan 06 10:49 AM

[RicRoe:]

Stock analysts are always talking about listing growth at eBay as if it is indicative of something of value.

Analysts have yet to realize that listing volume no longer is indicative of the health of the eBay marketplace.

Since John Donahoe's introduction of "Diamond " level sellers, listing volume increases are meaningless. There are two reasons why listing volume is now a worthless metric.

First, the reduction of listing fees as well as the frequent sales held on listing fees. eBay claims they reacted to seller complaints and lowered the up front fees to place listings. What eBay executives downplayed, and what analysts have ignored is that when the lowered fees were announced, they came with a steep increase in final value fees which caused many small sellers to abandon the marketplace in order to protect their profitability.

Second, Mr Donahoe has introduced Diamond sellers to the core market place. It is these major retailers that have brought the huge numbers of listings which eBay keeps boasting about. The problem here is that these sellers, some with a million or more listings are not charged ANY fees to place those listings on eBay.

Thus analysts need to start ignoring listing volume statistics as a health of the market metric, and instead insist that eBay make public their sell through rates.

Sell through is a much more accurate metric to study in light of the fact that listings alone no longer reflect any revenue growth for eBay since the majority of listing increases seen are the result of free placement by Diamond sellers.

For example, one eBay Diamond seller brings over 1,600,000 listings to eBay, but maintains a sell through rate of 2.3%. The listing volume looks impressive, but when one looks at the actual sales generated by those listings, the volume is very small. If that seller had been paying for placement of listings, they would probably have given up on eBay as a marketplace long ago.

But since Mr Donahoe has given them free listing space, they continue to bring impressive but none the less meaningless statistics to the marketplace.

Analysts assessing eBay must look for more relevant numbers to utilize in their assessment of eBay, and stop relying on the kool aid distributed by Mr Donahoe and his management team. Analysts need to stop relying on eBay's statistical spoon feeding, and instead, go back on the hunt to get meaningful statistics upon which the true health of the company can be more accurately assessed.

Jan 06 11:25 AM

[onlineseller:]

As eBay loses its sellers it will lose its buyers. The more hard to find items like good and rare antiques and collectibles will be listed on SeeAuctions.com. They can not compete with a site like this. They would have to lower there fees over 85% (it is not going to happen). Go check out the site SeeAuctions.com and you will see what i am talking about. Everyday there is more listings and more buyers on SeeAuctions. They have to be coming from somewhere.

Jan 06 11:39 AM

[Paul Price:]

Even ignoring the cash on the books you say EBAY shares are trading at just 9.3x trailing earnings.

That's an (after-tax) earnings yield of 10.75% which looks awfully good compared with most other companies and virtually any fixed income now available.

They may still fix their problems and attract a much higher multiple going forward. EBAY shares seem to have little risk from today's depressed level and lots of upside.

Jan 06 11:50 AM

[Patricia013:]

Ebay is losing the most important and the most valuable asset they had...the small sellers of the collectibles, vintage, rare and hard to find items. These are the sellers that attracted buyers to the site. As for the rest of the retail dropshipped junk one can find those everywhere online and in every retail store. What's the use of being one more of the same? The big problem is Donahoe is hungering after Amazon's success...but without wanting to put the years of sweat equity into forming the business properly. He is simply making Ebay look like a cheap and cheesy Amazon clone. This is such a dangerous path and the only reason analysts are beginning to realize it is because for the past 10 + years those small sellers built and made Ebay into a very very wealthy company! Unfortunately, instead of gratitude, Donahoe saw fit to laugh at them and call them a flea market and so much noise! Through their own arrogance and mismanagement It is all slowly coming to an end. Ebay allowed the small sellers to slip through its fingers and now those same small sellers are busy building up other sites. One good fact comes out of it all - there will never again be another monopoly like Ebay - and they killed that monopoly with their own hands!

Jan 06 12:12 PM

[Bob C:]

Small sellers built the eBay house.....I mean mansion, and small sellers are tearing it down, board by board. Many are smiling while doing so :)

The alternate sites are growing by leaps and bounds. Bonanzle is one of the top ones.

Hell hath no fury like a scorned former eBay seller!!

Jan 06 12:27 PM

[leapingcat:]

Ebay as an investment and Ebay as a place to buy and sell are dependent on each other in some ways, but not as closely as some commentors would like to think that they are. The companies policies are undoubtedly driving a lot of users, especially sellers, away, but the growth of Paypal (even most of the alternatives offer it as a method of payment) and some of the other pies that Ebay has fingers in still gives value to the company. Factor in the healthy cash position, and I tend to agree with the original analysis that the present share price doesn't look too far out of line. It even makes the company look a candidate for a hostile takeover and an asset-stripping break-up (check the figures in the OP.) Probably not in the current economic climate, but things never stand still for too long.

Jan 06 01:18 PM

[zeronimo:]

ebay is not the same company it used to be. people came to realize already that it is just another e-commerce website. sellers are leaving ebay and found other means to sell their stuff. the business model is dead.

as long as there is no fundamental change in the strategy or business model the investors will stay away from it.

Jan 06 01:36 PM

[jackus:]

eBays successful action was a flea market on the internet which then grew into
other items for sale. That being new electronics, computers etc... .

This successful action brought them to fame, a very high stock price and billions of dollars of profit.

At some point, eBay decided not to cater to this successful action and actually, began to destroy it.

Instead of protecting and rewarding this base of sellers they began to punish this activity with policies that particularly and dramatically harmed directly this group.

There may be other reasons eBay has found its stock falling. But in my opinion, the biggest is actively destroying its successful actions with ignorant actions.

Jan 06 05:56 PM

[NYM Arts:]

Yes indeed,
As a FORMER Ebay Seller (I sold my Special Invention)
How do you Spell Heaven ?
BONANZLE !

nymartsDOTcom

Jan 08 06:16 PM

[123:]

What are the numbers that you use in your sum of the parts valuation-are those EBITDA, EBIT, Operating Income, Net Income? What are you using?

Jan 14 08:57 PM

[5563:]

Paypal is only making money because ebay has instituted an illegal paypal only payment monopoly. This will be struck down by either the already filed class action anti-trust lawsuit or hopefully by a justice department/SEC/and administration no longer willing to tolerate the abuses of American Companies.

Ebay will go the way of Enron and Madoff as their illegal attempts to suck money out of their users backfires. Nobody wants to buy there because of the rampant shill bidding since they removed transparency from the bidding experience. Nobody wants to sell there because of 2 fee increases, no ability to leave honest feedback, constantly being cheated by fraudulent buyers and non paying bidders and the fact that ebay has NO customer service.

Ebay stock ended near it's historic low and their refusal to give any guidance for 2009 shows that they know it is going to only get worse for ebay. Stay away from this stock if you value your money. Even Meg Whitman and Pierre Omyidar are dumping stock, check the insider trading portion of their quarterly reports if you want to know how much stock they have dumped.

Jan 22 10:16 PM

[NYM Arts:]

"The Company has Lots of Cash and Generates Lots of Cash".
That's pretty Funny.
It's "Funny" because Ebay USERS aren't ALLOWED to have anything to Do with Cash.
And yet PayPal ILLEGALLY takes peoples money, and Ebay will Allow Sellers to pay for the Ebay Venue by Check.
Having a DOUBLE STANDARD in this fashion will Definately put Ebay out of business.
Real Soon.
Ebay stock will = ZERO
The authorities are waiting to pounce.

Mar 01 11:47 PM

[Cass:]

Amazing, anyone even thinking about investing in eBay stock has to be on drugs, or just simply crazy. eBay has fully and completely destroyed their future. Once eBay and/or Paypal which are owned jointly are found to have embedded the "malware" into Auctiva's system eBay will be completely destroyed. I for one am 1001% certain that all the trouble will lead right to eBay's doorstep.

For the last year I have likened eBay stock to a gallon of Icecream setting in the Arizona dessert. In February of last year I owned almost 45,000 shares of eBay stock and sold around $6,000.00 a month in goods on their site.

Today I don't own any eBay stock and sell on a completely different venue. The items I sell are seasonal and to date 85% of my "valued" customers have followed me to my new site. These customers may still buy on eBay, but I doubt that they buy the items that I sell on eBay. Why would they, some of them have been repeat customers for seven (7) years.

As a seller on eBay, I became totally insulted by "MR" HOHO. His antics over the last year have proven to drive both sellers and buyers off the site. As a seller on eBay I developed and nurtured my customer base, where I go they go.

Many long time eBay sellers are viewed as being "Main Street" mom and pop stores. In truth that is what many of the old veteran's were to eBay. As eBay shuts out the "Main Street" seller they also shut out the "Main Street" buyer.

Forget eBay as an investment, buy some IFLO or ECA either one of them is definately a better long term investment in a poor market.

Mar 08 04:10 PM