Ebay a Value Stock?

| About: eBay Inc. (EBAY)

Well, not quite yet, but with a forward P/E of 26 and growth that is still impressive considering its size, Ebay is an excellent long term investment. Granted, it is not the screaming buy that it was this summer when it went under $25 a share, but Ebay should easily eclipse $50 a share in 2-3 years.

The Ebay naysayer’s point to slowing growth, management missteps, and the alienation of the core Ebay community through fee hikes. Although many of these are legitimate problems at Ebay, Wall Street Mayhem believes that the growth potential of Skype and Paypal will overshadow the problems.

With all the negative press Ebay received when they purchased Skype, one would think Ebay had purchased a dot.com era flop. Analyst downgrades and Skype bashing were all the rage this summer for those who follow Ebay’s stock. Did Ebay really overpay for Skype? The answer is a resounding no. Skype was a bargain and an excellent strategic move for Ebay. Let’s take a look at the numbers. Ebay paid about $2.5 billion for Skype (these numbers vary wildly depending on the news source).

Despite many reports to the contrary, Skype is still growing. There at least 136,000,000 registered users, but that number really doesn’t tell us much about the core business at Skype. However, the daily users on-line numbers are very telling. It is estimated that the number of daily users has doubled from about 3 million when Ebay purchased Skype to about 7 million today. What do 7 million daily users and a still strong growth rate mean to Ebay? In short, big money.

A few days ago Ebay announced that in 2007 Skype users will have to start paying $30 a year for unlimited calling. Not a bad deal considering most other options including Vonage and the cable companies start at around $25 a month. Although this new source of revenue will not add up to much considering the massive revenues at Ebay, Skype is just getting started.

Next year Skype will introduce services with Google and Yahoo that will allow web surfer’s to click a button and call any business they found during a search. Additionally, Skype could always start including tiny ads for the pc based calls that would really add up with a massive user base. Although Skype’s financial contribution to Ebay is minimal right now, in a few years Skype should contribute a large portion to Ebay’s total revenues and profits.

But who wants to talk on the phone over the computer? Not many people, but with the adoption of Skype phones that allow Skype users to use their Skype phone in much the same manner as a traditional land line cordless phone, Skype growth should stay on track. In 2-3 years Skype’s yearly revenue has a legitimate change to be higher than the $2.5 billion purchase price. Not many aquisitions can boast those kind of revenue numbers.

Although there are still some hurdles and plenty of analysts that would disagree, here at Wall Street Mayhem we think that Skype will prove to be a bargain and will help fuel growth at Ebay for many years to come.

For a more in depth explanation of Skype growth check out the blog by Jean Mercier:


Check back in a few days for an in depth post about the virtually unlimited growth potential of Paypal and an analysis of Ebay’s core auction business.

Suggested Trades:

Buy Ebay under $35, buy a ton of Ebay under $30. Price target: $50. Buy and Hold.

EBAY 1-yr. chart:

Ebay Investment

Related Articles: eBay Watch: Executive Problems at Skype and News From the eBay China Rumor Mill; eBay Watch: Skype Leads VOIP Industry, Craigslist Dismisses Integrating PayPal and More