Our current price estimate for eBay (NASDAQ:EBAY) stands at $60, implying a premium of about 20% over the market. eBay has been performing well for the past few years given the secular trend of consumer shifts to the internet, strong growth in e-commerce and PayPal doing exceedingly well. As a result, we expect eBay to grow its revenues from roughly $16 billion in 2013 to $36.5 billion by 2020, implying a compounded annual growth rate (OTCPK:CAGR) of 12.50%. At the same time, we believe that the company’s free cash flow can jump from an estimated $1.77 billion in 2013 to $6.5 billion by 2020, growing at a CAGR of roughly 20% on the back of efficient management of net working capital and lower capital expenditures. Our valuation is based on a weighted average cost of capital of 10% and terminal growth rate of 2.5%. Below we take a look at the trends driving these numbers
PayPal Continues To Expand Its Presence
PayPal has been going strong over the last few years, with the number of active registered accounts rising from 57 million in 2007 to 143 million in 2013. The company added close to 20 million accounts in 2013 alone and continued this momentum by gaining 5.8 million accounts in the first quarter of 2014. The number of payments and the total payment volume are also growing thanks to the explosive growth in global e-commerce. Given the momentum and the opportunity, eBay is likely to try to push PayPal more in emerging markets where online payments still form a small proportion of overall transactions. E-commerce is still at a nascent stage in these markets, but over the next few years online purchases should pick up driven by the growing number of internet users and increased smartphone usage.
Business In Europe Remains Strong
eBay’s international revenues jumped from $4.57 billion in 2008 to nearly $8.34 billion in 2013, a CAGR of 12.8%. The last three years have been especially rewarding, as the growth was much higher than the overall CAGR for the last five years. Germany and the United Kingdom together accounted for about 49% of eBay’s international revenues in 2013, and close to 26% of its global revenues. Both markets grew at a similar rate of 15-16%, whereas the company saw its revenues from the rest of the world jump by 13%. This all around growth is an encouraging sign, as it reduces eBay’s dependence on a single market.
Given that the Eurozone and the U.K. are gradually coming out of recession, we expect eBay to benefit from some economic tailwinds as demand improves. We believe that eBay will continue to focus on expanding its international presence and lay greater emphasis on PayPal’s growth in emerging markets
Growth In E-Commerce And Mobile Focus
In Q1 2014, eBay enabled $58 billion of commerce volume, which represented an increase of roughly 24% over the first quarter of last year. This growth was driven by its focus on mobile, cross-border trade, especially in China, and the symbiotic relationship between eBay’s marketplaces business and PayPal. The company enabled about $11 billion of mobile commerce volume during the quarter, which accounted for roughly 19% of the total enabled commerce volume. In this regard, we believe that eBay is doing at least as well as Amazon (NASDAQ:AMZN) or possibly even better, as the latter reportedly earned roughly 5% to 8% of its revenues from the mobile platform in 2012.
According to eMarketer’s forecast, global business-to-consumer e-commerce sales are expected to jump by roughly 20% in 2014, amounting to $1.5 trillion. This expected growth is higher than what the industry saw last year, and much of it will be driven by the continued uptake in mobile usage in emerging markets, expansion into new regions and advancements in payment and shipping services. We believe that eBay will continue to benefit from these tailwinds and achieve its 2014 targets.
Disclosure: No positions