With eBay (EBAY) up 50% over the last 12 months, is the stock getting a bit "toppy?" Not by valuation standards. Based on a sum of the parts valuation it appears that eBay still has room to go higher.
The real investment thesis for eBay is the fact that its current multiples are being unfairly held down due to its primary classification as an e-tailer or e-commerce company, which is low-margin, macro-economic sensitive. However, I don't believe investors are appreciating the fact that nearly 40% of eBay's revenues are derived from its payments segment (namely PayPal) which has the opportunity for margin expansion and higher growth. Part of the real beauty of eBay is that the Marketplace (eBay.com), what you know as the auction site, is a cash flow generator, which in turn funds the growth and expansion of PayPal.
Sum Of eBay's Parts
For the SOTP valuation, let's break down its two key segments to better calculate eBay's appropriate multiples. So let's find some peers. eBay has two key segments - Marketplace and Payments.
Both Visa and MasterCard have plans to enter the mobile payments market, with Visa teaming up with BlackBerry and MasterCard with ING. eBay and PayPal's big move into mobile payments includes partnering with Discover to give retail outlets the ability to accept PayPal in store via Discover terminals.
For eBay's Marketplace peers, Groupon is a relative newcomer that is shaking up the e-commerce market (see if Groupon can turn around without Mason). Amazon continues to be the undisputed leader in the e-commerce market, and Overstock is a smaller e-commerce peer, but a peer nonetheless (check out other e-commerce newcomers).
The multiples for the major competitors are outlined below:
Comps - Marketplace
Comps - Payments
Blending these multiples based on eBay's sales breakdown gives us the following:
Price to Earnings
Price to Sales
Price to Sales. Applying the sales breakdown - 61% for the Marketplace and 39% for payments, and we get a theoretical comparable P/S multiple of 4.5x. The 2014 sales estimates by Wall Street comes out to $18.73 billion, which at the blended P/S multiple of 4.7 puts the potential stock upside at 22%, or to $64.85 per share.
Price to Earnings. Applying the sales breakdown - 61% for the Marketplace and 39% for payments, and we get a theoretical comparable P/E multiple of 25x. The 2014 EPS estimates by Wall Street comes out to $3.18, which at the blended P/E multiple of 25 puts the potential stock upside at 50%, or to $79.50 per share.
Price to Cash Flow. On a price to cash flow basis, eBay is well below its various competitors, where eBay trades at 19x cash flow, and its peer (blended) P/CF comes in at 32x.
Price to Cash Flow
eBay is cheap. Based on the brief SOTP valuation above, eBay is indeed cheap, but it also appears to be a compelling "growth at a reasonable price" opportunity. Wall Street estimates for long-term earnings growth at 15%, the price to earnings to growth ratio comes in at 1.27, with a ratio below 2.0 being a solid opportunity (read more about eBay's GARP).
News of late includes eBay's fourth quarter earnings results, which included EPS in line with estimates, but its balance sheet remains very healthy - cash on hand is upwards of $9.4 billion after the company managed to generate $1.09 billion in free cash flow for 4Q, up 265% quarter over quarter. eBay is quite a compelling investment. The stock is one of the under-appreciated online retailers with Amazon getting the blunt of the attention. eBay's strength is in part coming from a turnaround in its Marketplace segment, but will be driven longer-term by its Payments segment.