eBay Watch: True P/E Ratio, Listings Update, Business/Casual Seller Mix

eBay's True Underlying P/E Ratio

I posted a couple of weeks ago about the amazing six-year long P/E compression that has affected the eBay (EBAY) share price. Thinking about it this, I want to make two further observations.

1. Calculating a 2008 Ex-Cash P/E Ratio

Putting share buybacks and acquisitions aside for a moment, eBay will finish the year with $7.5 billion of cash. That means eBay's market cap of $35.5 billion could arguably be viewed as a $28.0 billion for the actual business and $7.5 for the expected cash. In calculating a "true" P/E, it is arguably more appropriate to use the $28.0 billion (or $21.10 per share) as the numerator as this is the pure equity value of the business generating the earnings. If we apply a modest 10% premium to eBay's uber-conservative 2008 EPS guidance of $1.65, we get $1.82. Therefore, I would argue that eBay is currently on sale for a forward P/E of around 11.6x.

2. Putting eBay's P/E in Context

According to Thomson Financial, the S&P is currently trading at 14.0x 2008 projected earnings. This would mean that on a P/E basis, eBay is actually trading at a 17% discount to the S&P as a whole. The discount is even larger if we assume that there is a lag in Thomson Financial's revising 2008 earnings downward in the context of an economic downturn. For a global business with leading positions in e-commerce, payments and communications online, I suspect the pendulum may have swung too far to the downside.

Week 9 Listings Update

According to JPMorgan analyst Imran Khan, week 9 listings data and YTD listings data to 3 March 2008 continue to exceed estimates. "On a reported basis, we have tracked 456.6M listings on eBay’s sites, up 11.7% Y/Y, ahead of our estimate of 5% growth for the quarter. Excluding China, listings are tracking up 12.5% Y/Y."

Y/Y growth in Q1 YTD listings therefore posts a fourth consecutive week of acceleration. That said, the new development this week is a sharp uptick in U.S. listings. This is, of course, what the fee structure change was intended to do. While it's still early days, the listings data suggest the controversial fee changes are already having their intended effect.

eBay's Unique Mix of Business & Casual Sellers

Listening to a recent conference by eBay CFO Bob Swan, it struck me that in terms of eBay revenue, the split between casual sellers (those selling the odd item to make an extra buck) and business sellers (those making a living through volume), is roughly 50/50. While Swan did not elaborate, I would assume that in years of economic prosperity, the growth in business seller volumes outpaces the growth in casual seller volumes. If we were to look at eBay 5 years ago, I would not be surprised to see the casual/business mix at 70/30.

The question is really: What happens in a deep economic recession? Intuitively, I would guess the balance of growth shifts back to the casual seller, for whom the incentives to sell on eBay are suddenly increased. Conversely, the balance of growth shifts away from business sellers who face tougher economics as a result of soft consumer demand. In contrast, perhaps, to other e-commerce destinations that focus exclusively on business sellers, the net effect for eBay is not at all obvious. Will 2008 mark the return of the casual seller?

Comments

[jrkirk:]

Only Ebay, you are ignoring the fact that ebay has inflated it's listing numbers significantly with false listings, created within the organization, and apparently also deleted the same way after the listing(s) are counted. The listing numbers mean nothing, given this information, as documented elsewhere within these blog threads. Have you read and watched the related videos? Suggest you go back and consider all the information.

2008 Mar 06 08:05 AM

[whoiskiddin...:]

The listing numbers havbe been manipulated in so many different ways it is unreal. Perhaps the Morgan Chase analysits (and all teh others) should visit the ebay forums, particularly Seller Cenral to find out all the ways they have actually been caught doing this, and that, like an iceburg, can only be the tip of reality.

However, it does make sense that in recession all big business will try to cut costs, thereby increaing bottom line, wherever possible, and that would include ebay listings. The theory of mom/pop sellers of small to medium size increasing their listings also holds true as the revenue is a contribution to houshold economics. However ebay has adopted the very opposite to conventional thinking and economics and is by all manner of methods seemingly deliberately driving away the very people who would have been a vital part of it's income during a time of recession, thus establishing that ebay itself will also be negatively impacted by the recession.

2008 Mar 06 09:44 AM

[fellowex:]

Nice conspiracy theory about the false listings, but absolutely not true. Test listings are created only to validate the listing processes are working correctly, not to inflate metrics, and are delete immediately so as to not clog up the buying experience. The numbers are not significant. So perhaps, jrkirk, you should get real data before asserting malfeasance and challenging other analysis.

2008 Mar 06 09:57 AM

[doublet83:]

There are several things wrong with your so called true p/e: 1. you are taking out the cash from the 'p' but you're not striping out the benefit of interest income from the 'e' 2. you don't take into account their low tax rate which is not sustainable over a long period of time 3. when comparing it with an S&P multiple, you don't give its ratio the benefit of the cash those companies will generate, not do you strip out the impact of cash.

2008 Mar 06 11:59 AM

[jrkirk:]

Felloex, you can believe anything you want, but the eBay listings inflated numbers are very well documented elsewhere within this blog on other threads. Have you looked?

2008 Mar 06 02:45 PM

[northernma:]

Ebay still has fake listings up. Proof? Go to Ebay and look at the number of ALL listings for Clothing, Shoes and Accessories (for example). It says there are over 25,201 pages of auctions. Now go to page 25,200. Hmmm, nothing there. Now go to page 20,000. Oh, still no listings? Well, let's try page 15,000......none.

Why do YOU think this is? OK, now let's try another category....same procedure. Where do the actual auctions start?

Yes, Ebay is inflating their listings. Go to the Ebay boards so you can get informed and have more proof and screen shots of other bogus and dastardly things Ebay is doing.

2008 Mar 06 05:22 PM

[Gotcha:]

It's not in EBAY's best interest to inflate listings because it sets the wrong expectations for Q1 earnings. In other words, the risks of being caught out by revenue that doesn't correspond with listings completely outweight the benefits of any intra-quarter misrepresentation. I have to say I am amazed any intelligent investor would ever fall for this "inflation" nonsense.

2008 Mar 07 04:40 AM

[Aussie Battler:]

Why is it not in feebays interest to inflate figures?
They will do anything to bag the sellers who are making "noise" and discredit the sellers boycott.
Check the ebay forums (if the comments are still there, over 9000 pages of comments have gone recently a lot on this very subject .
Watch for the MAYDAY , 1st of MAY SELLERS BOYCOTT(and a growing number of buyers)
Hopefully the reglatory authorities will find the padding of listings truth .

2008 Mar 07 05:37 AM

[Tony P.:]

"In other words, the risks of being caught out by revenue that doesn't correspond with listings completely outweight the benefits of any intra-quarter misrepresentation."


That statement would be true if there was an actual correlation between listing numbers and revenue, but there is no direct relationship between the two indices.

To illustrate, 1000 listings that end as sold (converted) will provide ebay with a revenue equal to $190, or it could provide $22,000 or more. It all depends upon the starting price and the ending price. This also illustrates just how truly meaningless the listing count numbers convey.

If ebay had 1-Million DVD listings that start at $0.99 and end at that price, the revenue produced would be $190,000. If, on the other hand, they were listings for high-quality goods started at $79 and all sold at that price, the revenue would be over $6,000,000. That is a difference in revenue-generation by a factor of 32. This also illustrates the concept of Quality versus Quantity.

Let's say that ebay has only one listing for an entire month and it is for all of the Trump holdings. The starting price is $12-Billion, and it sells! The revenue from that one sale ($180-B) would look very good, but would the fact that ebay shows a listing number of ONLY 1 cause the Analysts to jump from windows?

The recent glitch/test placed Shopping.Com listings on the ebay auction site, from the last few days of February to the first of March. Depending on which ebay spokesperson' statement you believe, it was either a glitch or a test. (it was a test - watch for it). That placed upwards of 2 million 'extra' listings on the site.

2008 Mar 08 05:22 PM

[Tony P.:]

"The revenue from that one sale ($180-B) would look very good..."

Should read... "The revenue from that one sale ($180-M) would look very good

2008 Mar 08 05:24 PM