2Q10 results for EBay were released last week. The results beat expectations, $1.20 actual versus $1.16 consensus, driven by strong results from domestic core business and PayPal. Following up on the previous "EBay is Dirt Cheap!" article, we decided to write a follow-up, more in-depth analysis.
Let's start big picture of the 3 revenue segments of EBay: Marketplaces (core business) is approximately 63% of sales and PayPal is 37%. EBay use to have a third segment, Skype, which use to generate 7% of sales, but the company sold it in November 2009 for $2.75 bn. EBay still retains 30% of Skype, so it does not show results on its income statement anymore, but it's recorded on the balance sheet under equity method of investments (meaning its under "long term investments" in assets).
Let's now focus on PayPal, the hidden jewel of EBay. In the latest quarter, PayPal grew 22% from the previous quarter. From 2007 to 2010, PayPal grew from 27% of Ebay's to 37% of sales. If you look at our previous article, EBay trades at 8.5x 2010E P/E (if you take out cash). The pay 8.5x P/E for a business where over 1/3rd of their business (PayPal) is growing at +20%, seems like an even bigger bargain to us.
Now let's look at revenue based on geography. Based on 2Q10, sales from the U.S. represented 47% of total sales, and International was 53%. Part of the concern with EBay's stock is exposure to Europe, given Int'l represents over 50% of their business. Nevertheless, Int'l still grew 4%, while U.S. grew 8%.
Lastly, in Part I of our EBay piece, we spread the tech / e-commerce comps, and the result was EBay trades at a 22% discount, or 12.3x versus 15.6x industry 2010E P/E average. If you adjust for growth, EBay's P/E/G ratio is at an even steeper nearly 50% discount, 0.61x versus 1.17x industry average. Given PayPal is 40% of their business and is comparable more the electronic payment companies, we decided to spread the credit card companies as well. As you can see below, EBay's P/E and P/E/G multiples are still at a significant discount relative to payment processing/credit card companies.
Finally, we did a quick sum-of-parts analysis based on applying appropriate industry multiples on the different revenue segments of EBay, and then added in the net cash they have on their balance sheet. We get an implied share price of $30.33. This is before accounting for possible upside in Skype, which EBay owns 30% and is currently only captured in the implied share price at book value, not market value (it's part of the net cash amount added).
Disclosure: Adding new position in EBay