eBay: Sum of the Parts

Payments

PayPal had Q2 revenue of $602 million and is on track to reach 2008 revenue of $2.5 billion and somewhere around $3.3 billion in 2009. This implies a 2009 top-line growth rate of 32% which would be a modest deceleration from current rates and assumes PayPal will continue to be able to counterbalance lower growth rates on-EBAY with an ever-increasing proportion of business coming from Merchant Services.

PayPal's operating margin (excluding options) is expected to come close to 20% in 2009. This would yield 2009 pro-forma operating income of $660 million and tax-adjusted pro-forma earnings of around $500 million. If we assume a forward P/E multiple of 30x (restricting PEG to under 1.0x) we get a current valuation of roughly $15 billion.

This would value PayPal at the low endpoint of the range Meg Whitman used to give back in 2007.

Communication

Skype had an encouraging Q2. Of the various publicly available metrics, the two most important are concurrent users (as a proxy for active users) and Skype-Out minutes (where Skype makes most of its revenue). Both of these metrics displayed a second consecutive quarter of accelerating growth in Q2, and now hover around the 40% mark.

Skype had Q2 revenue of $136 million and is on track to reach 2008 revenue of $570 million. Assuming revenue growth continues to decelerate until it also reaches 40%, we can expect somewhere around $800 million in 2009 revenue.

Skype's operating margin (excluding options) is expected to come closer to 16% in 2009. This would yield 2009 pro-forma operating income of $130 million and tax-adjusted pro-forma earnings of around $100 million. If we assume a forward P/E multiple of 40x (again restricting PEG to 1.0x) we get a current valuation of roughly $4 billion.

This would value Skype much lower than the 10x revenue multiple Henry Blodget suggested earlier this year.

Marketplaces

Marketplaces is a collection of properties across increasingly diversified e-commerce channels and monetization models. The division includes everything from traditional GMV-based marketplaces (ebay.com, stubhub.com, half.com etc...) to pure advertising-based businesses like comparison shopping sites (shopping.com) and online classifieds sites (kijiji.com, gumtree.com, etc...).

Notwithstanding the much higher growth levels of the advertising-based businesses, Marketplaces has seen its Y/Y revenue growth halved from 26% in Q207 to 13% in Q208. The business unit is now growing slower than e-commerce as a whole and has some significant strategic decisions and risks in the months/years ahead.

Marketplaces had revenue of $1.458 billion in Q2, with $1.233 billion (85%) coming from GMV transactions and 225 million (15%) coming from advertising. Despite its slowdown, the division is well on track to post its first ever $6.0 billion plus revenue figure for 2008 and assuming a modest 10% growth rate once the current economic environment starts to be lapped, should post somewhere north of $6.6 billion in 2009.

Marketplaces' operating margin is pretty stable at around 40%. This yields 2009 pro-forma operating income of $2.6 billion and tax-adjusted pro-forma earnings of around $2.0 billion. If we assume a forward P/E multiple of 10x (again restricting PEG to 1.0x) we get a current valuation of roughly $20 billion.

Apart from being among the lowest valuations for Marketplaces I have seen to date, this would put Marketplaces (as a stand-alone company) in contention for the lowest P/E ratio of any Nasdaq 100 company.

Summary

 

To complete my sum-of-the-parts valuation I need consider EBAY's cash and minority interest positions. At the end of Q2, EBAY had $3.7 billion of cash and cash equivalents and is on track to generate another $1.3 billion before the end of the year, bringing the 2008 cash total to $5.0 billion.

EBAY also has several important minority stakes including ~20% of MercadoLibre, ~25% of craigslist, and ~49% of Tom Eachnet - among many other smaller stakes (fon, meetup.com, ChannelAdvisor, etc...). MercadoLibre's market cap is currently $1.5B, craigslist has been valued as high as $5 billion, and Tom Eachnet is holding its ground in a market already larger than the US. For the purposes of this analysis, I'll take a very simplistic view and value them all at $2.0 billion.

Putting all the pieces together yields a total equity value for EBAY of $46.0 billion ($35.11/share) at the end of 2008, a 38% premium to the current market cap of $33.3 billion ($25.40/share).

Comments

[Tippie:]

Great!
What you are in fact saying is that eBay has loads and loads of cash money and is really worth $35.11 per share, right? lol.

eBay will be lucky if they are worth $15.00 by next year, lol.

This company seems to be going down the tubes by keeping their so called auction venue business!

If I were eBay CEO I would want my shares to be worth $100.00 per share and not hover around $25.00 bucks for years on end!


Jim Cramer said it best! Someone should buy eBay and put them out of their misery. eBay is a ship of fools!

2008 Jul 28 12:19 PM

[Et tu, Brute!:]

And Motley Fool, who has always been an ebay/paypal cheerleader, says "Sell...!"

2008 Jul 28 03:40 PM

[Network Effect:]

It's a lost cause buddy. No matter how great eBay's business is, Wall Street hates the stock. I couldn't agree with you more. They have three of the best business models in the world, and put together, I would put it up against anyones (business model that is). But execution is unfortunately a factor. There is no culture of innovation inside the company. It is drowing in its own bureaucracy. Regardless, even if it wasn't, Wall Street just doesn't like the stock, and they haven't for 3-4 years. Ever since the decline from $60, Wall Street beats down the stock every time it gets any traction. Not exactly sure why, but it is what it is. Unfortunately, Wall Street buys stocks, not businesses these days. And they treat the stock like a piece of junk, so that's where it stays. The business, however, is one of the best out there.

2008 Jul 28 05:26 PM

[VA:]

Everything's changing, Wall Street was once too exuberant on eBay, now it's too pessimistic - nobody said it's there to stay. Especially if we see in a bad economy people switch from buying gadgets like iPhones and Garmins to selling/buying on a flea market. In short, I honestly believe there are much more chances for the stock to go up than to go down from here.

2008 Jul 28 11:59 PM

[gdog:]

Solid analysis.

The core marketplace business, and more specifically, ebay.com, may have some issues at the moment, but overall this company makes a ton of cash, paypal has very solid growth, and skype adds more users in a week than vonage ever has.

When people are fearful it's time to get greedy, and market sentiment can change quickly.

2008 Jul 29 12:50 AM