eBay (EBAY) is the largest auction site on the internet. It also owns one of the world's leading payments companies, PayPal. eBay has jumped onto many investors' radars over the past week as notable billionaire and activist investor, Carl Icahn, has taken a stake.
Icahn has been a force over the past few decades and was quite possibly the most successful activist in 2013, taking market moving stakes in major companies that included Netflix, Herbalife and Chesapeake Energy.
Our question is becoming, is Icahn biting off more than he can chew of late? Of course, many thought the same thing when Icahn made his big bet on Netflix and we all know how that turned out. Icahn's latest battle include going toe-to-toe with Apple CEO Tim Cook and trying to push eBay to spinoff PayPal.
As far as eBay goes, it appears to be doing fine on its own
Over the last three years, from 2011 to 2013, the internet company grew revenues 37%, gross profit 34%, and operating income 42%. And it doesn't stop there; the stock is up 260% since its low in 2009, and the technical indicators are bullish.
eBay is also crushing industry averages on a trailing twelve month basis, with gross profit margin at 68% versus the industry average of 64%, its operating profit margin is at 21% compared to the average -1.8%, net profit margin 17% vs. -7.2%, return on equity of 13% versus 11%, return on investment 10.4%, compared to 9.6%, and revenue per employee $479,015 versus $323,372, etc. etc. etc. As you can see, the company seems to be doing quite well.
It's not all sunshine and rainbows though
However, the e-commerce giant still has a number of issues that need to be dealt before we're ready to call eBay a growth story. Those issues have actually been what's keeping the lid on its stock price, as it hasn't been able to break out of a trading range of $48 to $58 since November 2012.
Firstly, the numbers over a longer horizon aren't all that appealing
Over the trailing twelve months, eBay's stock has gained a mere 3%, whereas the tech-heavy NASDAQ is up 33%. And from 2011 to 2013, its net income dropped 11%, profit margin decreased by 35%, and EPS declined 11%. In addition, eBay's trailing 12 month revenue growth rate of 14% was well below the industry average of 33%. This may indicate that the company is becoming less efficient at using its resources. eBay's PEG ratio is also at 1.7 while the industry average is less than 1.0.
Second, Icahn could prove to be a major distraction
Carl Icahn, who owns approximately 1% of eBay, has put a proposal to spin-off PayPal into a separate company on the table, believing that both companies would have a higher value as standalone entities. eBay management disagrees with Icahn's conclusion and has indicated its reluctance to such a move. As a result, a protracted proxy war may be unavoidable. Sometimes these issues take years to settle, only adding to the uncertainty moving forward.
Also, because the benefit of a divestment of PayPal is uncertain and the methods and timing of a resolution are unclear, an unfavorable environment from a credit standpoint may be created for the foreseeable future. It is also possible that if eBay were to spin off PayPal, the remaining Marketplaces business would encounter higher long-term business risk since its growth prospects would be tied to its ability to bridge the gap between online and offline retail. While PayPal might thrive as a standalone company, it's not clear that eBay Marketplaces would have the necessary tools to execute its retail strategy.
Finally, there's just too much competition
Any conversation about competition in the tech space is not complete without mentioning Apple. The tech giant, which also has its own battle against Icahn, recently-announced an effort to explore its own mobile-payment business.
This plan to compete with eBay is not welcome news for PayPal, which is one of eBay's key cash flow generators, accounting for over $20 billion in revenue in 2013, about 40% of eBay's overall revenue. Although PayPal is the world's most popular mobile-payments service, boasting over 140 million registered users, the competition in the sector was intense even before Apple's announcement. You already have the likes of Square and Stripe clamoring for a spot on consumers' phones, helping make it easier to pay for physical goods via smartphones.
It's unclear exactly what Apple has in mind, what technology it will use, or what its goals are. It could simply act as a mobile wallet, which is what Google Wallet has attempted to do. It could also give customers the ability to make in-app purchases for non-digital goods using credit cards already associated with its 575 million iTunes accounts.
It's also possible that Apple could allow iTunes accounts themselves to be used as a payment method at physical stores for physical goods and services. Regardless of which route it goes, it could an instant major player.
All in all
While eBay certainly has its strengths and is not stagnant in its pursuit of success, one has to wonder whether it can overcome the serious challenges that lie ahead. Trading at 25x earnings and 4.5x sales, it's already stretching its historical trading multiple averages. Using its historical price-to-earnings multiple would suggest it should be trading closer to $50. Because there are multiple large dark clouds on the horizon, we recommend staying away from the stock until the future becomes a bit clearer.