eBay Looks Cheap Even with All The Negatives

There are plenty of commentators noting that eBay (EBAY) is facing numerous challenges in the current environment:

• Concerns about the impact of a slowing economy on the business.
• Problems with its community of sellers over fee structures.
• Competition from large players such as Amazon (AMZN) and small niche operators.
• With 50%+ of revenues from outside the US there is an exposure to a rising US dollar as well.

eBay also hit a 52-week low of US$19.95 on the 29^th September.  On the positive side, eBay has also grown revenues at a compound annual growth rate of over 30% since 2004 (2004 revenues of US$3.3 billion to US$7.7 billion in 2007) while generating profits (at the EBITDA level) in the mid-30% range.  We decided to look at the underlying numbers for eBay using the Valuecruncher on-line valuation model to see what we think about the current share price.

Valuecruncher valuation model of $EBAY with interactive assumptions

Valuecruncher produces a valuation of US$23.88 for EBAY.  This is a current valuation not a target price.  This valuation is 14.5% above the current share price of US$20.85.

Assumptions

Our assumptions are revenues of US$9.0 billion in 2008 growing to US$11.0 billion in 2010. We have used an EBITDA margin of 36.5% in 2008 decreasing to 35.0% in 2010. Our terminal growth rate is 3.75%. We used a terminal capital expenditure number of US$800 million. Our WACC (discount rate) is 11.0%.  All of these assumptions can be amended in the Valuecruncher on-line valuation model to adjust the valuation.

Our analysis incorporates the cash on the EBAY balance sheet – Valuecruncher calculates a net debt number.

Based on our analysis the current share price looks cheap.  We also think our assumptions are pretty conservative.  Looking at some sensitivities:

• 2010 revenues drop to US$10.5 billion – Valuecruncher valuation drops to US$22.77 (9% above current price).
• 2010 EDITDA drops to 32.5% – Valuecruncher valuation drops to US$22.13 (6% above current price).
• Terminal growth rate drops to 3% – Valuecruncher valuation drops to US$22.10 (6% above current price).
• All of these downside sensitivities occur – Valuecruncher share price drops to US$19.57 (6% below current price).  That is a pretty negative outlook however.

Play with our assumptions – what does your analysis say?

Disclosure: None.

Comments

[User 273650:]

Ebay had a golden opportunity during this financial crisis. As the economy got worse, people would have placed items onsite just to make ends meet. The cost of doing business on the site is no longer worth it. Donahoes ego has cost them dearly. There is very little hope of bringing back the sellers as we have gone to other venues that appreciate us.

2008 Oct 02 10:23 AM

[Dinah Balk:]

$19.95 will soon become eBay's new high because no e-commerce site can survive when it creates a no win situation for sellers.

After all, what seller is going to waste his/her time & money on eBay because NOTHING WORKS!

2008 Oct 02 10:52 AM

[charles123:]

BACK IN FEBRUARY AND EARLIER MY EBAY FEES WERE BETWEEN $700.00 AND $2000.00 A MONTH AND I WAS TICKLED TO DEATH AND WANTED IT TO BE EVEN HIGHER.
NOW-THIS MONTH MY FEES CURRENTLY BELOW $8.OO ( EIGHT DOLLARS )I NEVER HAD IT SO BAD.
INCREASED FEES,THREATS,BUYER FRAUD RUNS RAMPANT.I NO LONGER CARE TO SELL ON EBAY AFTER NINE YEARS OF PROSPERITY. EBAY AND S..T HAS HIT THE FAN

2008 Oct 02 11:35 AM

[Bob C:]

"Our assumptions are"
We all know what assumptions do, don't we?
Word is getting out about the way eBay is treating its customers. The sellers are eBay's customers, not the buyers. I've been both since 1997.
I used to love eBay, but I'm starting to hate it, and soon will leave it, if things don't improve very soon.
Thinking about buying eBay stock? Please check out their community boards to get a feel for the mood of its true customers. While doing so, please keep in mind that eBay censors some of the content.
Then, if you still want to buy eBay shares, I've got a bridge that you may be interested in purchasing.

2008 Oct 02 11:45 AM

[J.Donahoe:]

The economy is a little slow, but the stock will rise to a all time high very soon. Customers are delighted with the new policy changes.

2008 Oct 02 12:13 PM

[Henrietta:]

Small sellers revolted in Q1 and Q2. Larger sellers are finding the hassle too much in Q3. Most are stuck on the site through Q4. Unless eBay fixes a bunch of stuff PDQ 2009 Q1 will be ugly.

Although eBay likes to refer to 'our buyers' their customers are sellers and as more and more sellers pack it in the choices 'our buyers' will have get less and less.

Unless your assumptions are based solely on advertising & non-marketplace income they are probably not valid assumptions or even calculated projections. They are just guesses.

2008 Oct 02 12:57 PM

[J.Donahoe:]

should I resign? It seems people are uptight! Maybe I should just raise the fee's more & change more policy's, & even suspend more sellers for no reason at all. It's all for the eBay community!

2008 Oct 02 01:17 PM

[homergreg:]

What's eBay's p/e ratio? 50? That kind of ratio is not going to cut it if growth isn't extremely high. I just don't see it.

2008 Oct 02 02:18 PM

[Disgruntled...:]

I must echo the other comments of the folks above. EBay had been a great place to make a living. It is now being geared towards a more Amazon model. The new rules placed on sellers of no more paper payments, i.e. checks/money orders, will severely limit their sales opportunities with the older baby boomers who do not trust, nor do they use online payment options. In my collectible business, this represents half of my customer base. This issue, coupled with the fact that sellers no longer have a level playing field with buyer ratings on feedback, makes the site untenable for most sellers.

The incentives offered by eBay’s new fee structure favor only the corporation, not the sellers, who make it possible for eBay to keep the lights on. I for one am trying my best to close out my current inventory on eBay and other sites, with a complete migration to other venues by the end of the year. It is simply not worth the effort to try and eek out a living when you must constantly be jumping through hoops. EBay was a great venue when they were providing a platform for independent business people to provide their services. When they started dictating how individual businesses were going to conduct business, by taking away half of our payment options, they stepped over the line in my opinion. I am done with them. I used to own stock in the company. I sold it a while back when I saw the changes that they were making and realized that they were running the company into the ground. Think George W. Bush's rational for the "big picture" of things and you will get a glimpse of what appears to be eBay's current mindset. Sad really!

It was a great company at one time. Those days are now gone!

2008 Oct 02 02:45 PM

[rctman:]

Here’s some food for thought ?? How does Ebay’s new partner buy.com maintain a 99.6% positive rating, when they are about 50% at Pricegrabber and other venues. Is there a pot o feedback cooking somewhere ? And yes you need to resign.

2008 Oct 02 03:32 PM

[lindaj:]

Fortune started it's article today like this:

Recessions are supposed to be boom times for yard sales and flea markets, so what’s eating eBay (EBAY), the world’s largest bargain bazaar?

I can tell you what happened. Our great and not so brilliant leader took one look at the site that he took over and frowned. He said it looked like a flea market. And, he made that comment like it was a dirty word.

Then, he immediately started getting rid of the old. Getting rid of the unique. Getting rid of the hard-to-find items.

Now, search is geared to the assembly line seller who has hundreds of each identical item. Sell one and you get more visibility. Sell two like items and you get even more. etc. etc. etc.

All the while, the unique and used items are pushed right off the site.

There are Free listings for a book seller selling items you can find anywhere and that results in 800,000+ 3 day listings just getting repeated over and over and over while those of us who once made a living on Ebay are paying ebay more than we can make these days.

Best match makes selling on ebay a crap shoot at best and more like a losing battle.

Ebay is now boring, blah, plain (the new listing page is terrible) but you can sure find anything made in China there.

It's a shame what Donahoe has done to the site in just a few short months. My sales started going down when they started manipulating search. Now, it is clear that neat collectibles and good quality used items are just not wanted there anymore.

Unless they roll back the clock to around 2004 I don't see much future there as a seller or as a buyer.

2008 Oct 02 03:32 PM

[rctman:]

Here’s some food for thought ?? How does Ebay’s new partner buy.com maintain a 99.6% positive rating, when they are about 50% at Pricegrabber and other venues. Is there a pot o feedback cooking somewhere ? And yes you should resign.

2008 Oct 02 03:34 PM

[Et tu, Brute!:]

Here's the deal: John Donahoe doesn't have in his little toe the savvy and brilliance and vision Amazon founder and CEO Jeff Bezos does. It just "ain't" there!

2008 Oct 02 03:44 PM

[jay dee:]

Yeah Disgruntled I'm with you.

I can not believe what a DESPICABLE UNDERHANDED company EBAY HAS BECOME :

I am one of those old school people who prefers to deal in money orders, cash, etc.
I am a ebay seller and even though they railroaded me into having to use Pay Pal - I try not to deal with Pay Pal.
All my listings state that I only accept "other" payment methods.

My buyers are vintage automotive enthusiasts - they have no qualms about paying with money orders - they have just searched the globe for that part they need, and are willing to make payment whatever way that will get them that part.

The UNDERHANDED part :
When I go to send an invoice - there is an automatic message from ebay that acknowledges that I don't take Pay Pal.
Then it goes on to state that by sending the buyer invoice the YELLOW PAY NOW (Pay Pal) button WILL appear on the invoice.
Now here is the real DESPICABLE part - ebay (intentionally) deletes my mailing address from the buyers invoice.
The idea behind all this, I assume, is to force the buyer into clicking on thr PAY NOW button as there is no address to mail payment to and the only way they are shown to submit payment, is to click the (Pay Pal) PAY NOW button.
Man talk about extortion by manipulating transaction details and conditions !

Awhile ago ebay notified the sellers that pretty soon in the USA non Pay Pal payments will be a "VIOLATION" of ebay policy. You will only be allowed to accept payment via Pay Pal - cash, mo's etc will be AGAINST ebay POLICY .
They go on to coach the sellers on what to tell BUYERS who don't want to use Pay Pal - talk about communism !!

We are now being pressed into selling EBAY'S doctrine to our customers : one of the lines we are supposed to parrot: is that it will give the customer "QUICKER DELIVERY" ! Who is actually going to carry out this quicker delivery promise ?? The sellers !!
The sellers are now be expected to have whatever item just got sold, ready to ship pronto !!
I do not run a store with items nicely packed and ready to be pulled of the shelf and shipped.
Many of my items take HOURS to properly pack (after locating suitable boxes, crates etc) - I only pack after items get sold - it would be ludicrous to have everthing nicely packed, weighed, shipping calculated for all corners of the world - but that is what Ebay is promising our buyers.
Ebay is using (raping) the sellers with their marketing promises - They now have the buyers expecting immediate delivery because they paid for the item with Pay Pal (immediately).
To add insult we have the DSR rating system where the buyers have no clue as to what the implications are for the sellers - They get to rate you on Shippping Time as well as Shipping Cost.
So BillyBob in who knows where gets to seriously affect my selling status because he didn't get his item next day and would have to have paid less for shipping - regardless that it took me 3 hours to pack his $75 item so that it would survive any possible peril.
And then if he had paid with Pay Pal BillyBob gets to say he never received the item - Pay Pal then will take the money back out of my account and the only thing I receive for all my work along with the item is Negative feedback.
We the sellers are now the migrant workers toiling away for the benefit of Ebay shareholders and investors who have no loyalty or sympathy for us whatsoever.
This is like the Ukrainian Holocaust where ebay just squeezes out every last penny out of the seller peasants.
Amen !

2008 Oct 02 05:04 PM

[$10 is near:]

How can a company survived by alienating their fundamental paying clients, i.e. ebay sellers? You can analyze all you want about its past glory, ebay is heading to its grave by the minute.

2008 Oct 02 10:05 PM

[Aheadsup:]

Who needs to be associated with a dictatorial site like ebay. We see enough people trying to control every aspect of our lives. What was once liesure and fun is now annoying and pointless. Why give a site money to make nothing when there are plenty of other options out there? It's almost as dumb as putting money into a slot machine...although, the odds of making money are probably a bit better in the casino than on ebay.
It's becoming clear, unless there is a total about-face, ebay is a site destined for the largest fall in the history of online commerce.

How does a man keep his job when he's obviously clueless to the basic fundamentals of business? Is J.D. sane? I truly think that is a fair question.

2008 Oct 02 10:25 PM

[Fufafa:]

It's time to let ebay know how you really feel, you should post them on this site, this is for anyone who has been screwed, ripped off or felt that they had been done wrong. The name of the site is uradeadbeat.com, it gives you a voice to the people who will not listen. Not only does the person who you are complaining about receive an email letting them know that they have been put on the deadbeat list (as long as you provide email address) but, they will also receive a post card (as long as you provide a mailing address) notifying them too.

2008 Oct 03 02:14 PM

[najrac:]

For all those who want to see the truth for themselves, go sign up at Terapeak.com, which tracks all of ebay sales results by category, seller, item, etc. I spent hours going through all of the data, seems to me that while eBay has annoyed (or chased off) a bunch of sellers, but there are many other sellers who are still making sales on ebay. In most categories, transaction volume (in $) has been flat or growing in 2008. eBay motors looks quite weak right now, but US car sales are at their worst in many years, so that's not a surprise.

2008 Oct 03 10:11 PM

[thetruthislies:]

How can a webpage make money off of ebay and then claim to tell the truth? It's too funny. For the educated, ebay is not the place to buy or sell anymore. Now you've heard the truth.

2008 Oct 04 12:47 PM