eBay (NASDAQ:EBAY) is scheduled to host an Analyst Day on Wednesday, March 11, the first under the new CEO John Donahoe. At a share price of $10, the stock is trading at its lowest levels since 2001. The shares are down approximately 80% from all time highs set in late 2004. This compares to a 50% contraction in the S&P 500 over the same time period. Clearly, management has destroyed value.
I am not anticipating any game changers from the Analyst Day and I am not coming out with a list of questions for management. However, I do have a few ideas which I will discuss later.
But first, this is where eBay stands as a company:
- The company’s core business has lost significant market share to Amazon (NASDAQ:AMZN) and niche ecommerce sites and the share loss is likely to continue for the foreseeable future. Several structural challenges exist that is likely to keep a lid on growth from some time. Further, average selling prices and conversion rates continue to trend lower leading to continued negative year-on-year GMV growth rates. User traffic growth has been negative for several months and is indicative of the subpar buying experience and the demand problem that the company faces. Sellers continue to migrate to other channels in search of a better selling experience and higher ASPs and conversions.
- Advertising and classifieds are clearly strong businesses; however, overall industry trends for advertising and classifieds are negative. Thus, the strength in those businesses are due to them growing off low bases and I believe they will likely succumb to industry wide trends. Shopping.com already felt the pinch in 4Q08, with a revenue decline of 50% YoY, but management blamed this, in part, on search engine algorithm changes.
- No one can argue that Skype is a great standalone business (I use it quite often) but management has finally fessed up to the fact that it is non core and are seeking buyers. The 44% revenue growth rate in 2008 and double digit margins are impressive, but eBay must part ways with the business. Note that the growth rate on Skype averaged 50% in the first three quarters of 2008 but declined to 25% in the fourth quarter.
- That leaves PayPal, which has great competitive advantages and represents the diamond in the rough or the crown jewel of eBay’s business model. The runway is wide and long for this business, in particular, the off-eBay Merchant Services business, which grew 50% in the last quarter based on transaction volume processed.
- The company has a stockpile of cash in excess of $3.2 billion, but close to 90% of that cash is located overseas. Bringing the cash to the U.S. to conduct share repurchases, acquisitions, or a one-time dividend, will lead to huge negative tax consequences.
eBay’s Marketplace business, which includes the core auction and fixed price business represented 55% of revenues in 2008. The auction business accounts for half of gross merchandise volume but matured two years ago and appears to be in the decline phase of its product cycle. However, the business is still a cash cow and I think, contrary to some, that the business can be salvaged by focusing on categories that still lends itself to the auction model, such as Collectibles. The option here is to bifurcate the marketplace business by focusing the auction model on certain categories, and focus the fixed price business on rest, while simultaneously attempting to improve the user experience on the entire business.
On Skype, the sale price should bring in about $1.8 billion in cash. eBay purchased the business for $2.6 billion in 2005 and recently wrote down the value by $900 million, implying a $1.7 billion value for the business. Alternatively, the business should generate close to $700 million in revenues in 2009 and assuming a 20% EBITDA margin, we arrive at $140 million in EBITDA. Apply a 12-13x multiple to the business would yield a $1.7-$1.8 billion value or about $1.35 per share. I am not sure if the cash from the sale would be housed in the U.S., but if it is, eBay can use the cash to retire shares or maybe consider a special one-time dividend.
For PayPal, I have argued that a sale is not optimal because the value of the synergies with the core business would erode over time. What management can consider is a spin-off of 50% of the business to existing shareholders. In that way, shareholders get a new currency of a business still in its growth phase, and management maintains control.
Hopefully for eBay’s shareholders, management gives them something that would be catalysts for the shares.