eBay: Strong Seasonality Effect Kicking In

Caris & Company analyst Tim Boyd addresses clients on his expectations for eBay (EBAY) in the typically strong 4Q. Excerpts follow:

Strong Seasonality Kicking In; 4Q06 Listings Growth Now Tracking Towards Our Estimates

• Our QTD core (i.e. excluding Stores) listings count is up 15% Y/Y – this represents a deceleration from the 20% rate that eBay posted in 3Q06.

• Our QTD Stores global listings count is up 16% Y/Y – this represents a deceleration from the 85% rate that eBay posted in 3Q06.

• Our QTD count implies full-quarter listings of 630MM (up 15% Y/Y) vs. our published estimate of 666MM (up 22% Y/Y). Please note that our extrapolated full-quarter listings estimate does not adjust for the significant positive linearity typically seen in eBay’s December quarter results, thus making upward revisions likely as the quarter progresses.

• Our QTD count indicates an 88% core, 12% Store listings mix – this is a strong improvement from last quarter’s 84%/16% mix and suggests rising levels of listings monetization.

We maintain our 2*/Above Average rating and $37 target valuation on EBAY shares. Our target valuation is based on a combination of P/E and EV/EBITDA frameworks. P/E: we apply a 23x multiple (1.3x our LT growth assumption of 18%) to our 2008 pro forma EPS estimate of $1.57 to arrive at a $36 target. EV/EBITDA: we apply a 14x multiple (0.8x our LT growth assumption of 18%) to our 2008 EBITDA-per-share estimate of $2.40 to arrive at a $37 target (adjusting for $3.60 in YE07 cashper-share). Risks to our target include: (1) slowing growth in key markets such as the U.S., U.K. and Germany; (2) margin pressure from increased Sales & Marketing spend; (3) increased competition in the ecommerce sector.

Comments

[K Shek:]

www.streetinsider.com/...

I agreed with Tim. The $37 valuation is reasonable. Last year around this time, Ebay's active items were iPod, XBox and PSP, etc. This year it has a lot more big tickets items like PS3, XBOX, WII, IPOD, big screen LCD TV..., etc. In Q4, Ebay certainly will have higher listing income as well as income from Paypal fees. Also, Ebay introduced Skype-Me pilot program around the world and received very good results. It provides Video features that Vonage or other VoIP companies do not have. There are so many ways Ebay can make use of Skype. When Skype gains more popularity in US, EBay may start charging fees for its usage. Don't forget Skype has 25 million users in China and the number is still growing.

Many people believe Ebay made a big mistake on the expensive acquisition of Skype. However, if it generates income, the same people may have different opinions. Optimum Cable charges $19.99 for its VoIP phone service; Vonage charges $14.99 for its monthly VoIP service; Skype charges $0 per month.... So only time will tell whether this acquistion will add valuation to Ebay future growth.

2006 Nov 30 12:13 AM