eBay Inc. (NASDAQ:EBAY) is primed for better organic growth after a number of years of stagnation. Several large activist investors have encouraged the company to refocus on its core e-commerce website, divesting other businesses purchased and developed over the years with its huge cash flow generation. My bullish take on the company is based on the coronavirus pandemic increasing eyeballs and sales, at the same time as margins/returns from the original business are improving. Wall Street will likely decide to place much higher valuation multiples on the remaining blue-chip technology, profit machine.
eBay is a global e-commerce leader, with two divisions - Marketplace and Classifieds matching millions of buyers and sellers around the planet. The company uses online technologies and services to give buyers a choice of inventory from sellers worldwide, virtually anytime and anywhere. Marketplace includes the company's main operating business at ebay.com, plus localized counterparts and the eBay suite of mobile apps. Classifieds includes brands such as mobile.de, Kijiji, Gumtree, Marktplaats, eBay Kleinanzeigen and others.
Image Source: www.ebay.com
On February 13th, eBay completed the previously announced sale of its StubHub business to an affiliate of viagogo for $4 billion. The company used proceeds to buy back stock and repay debt. In addition, the Classifieds unit is up for sale, with negotiations ongoing. Expected sales proceeds are in the $8-10 billion range. After this final divestiture, eBay will be left with its original operating business. Large hedge fund investors are hoping a renewed focus on the eBay platform will produce organic growth at improved margins, and an even higher Wall Street valuation of the remaining business.
In March, activist firm Starboard Value nominated four candidates to the board of directors to add pressure in the search for a new like-minded CEO. In the end, this effort was dropped with the hiring of Jamie Iannone a former executive at Walmart (WMT). Mr. Iannone served as chief operating officer for Walmart's U.S. e-commerce and had previously served as a vice president at eBay for eight years. He succeeded Devin Wenig, who resigned in September under pressure from Starboard and fellow activist Elliott Management.
Improving Operating Performance
eBay is part of a small minority of U.S. businesses actually issuing revenue and income guidance for the year, expecting the coronavirus economic shutdown to have only a cursory effect on operations. Including cost control initiatives, its large share buyback after selling StubHub, and just slight organic growth, management is projecting free cash flow of $2.2 billion on revenue of $9.65 billion in 2020. You can review a better explanation of the numbers below, released last week.
Image Source: Company 1st Quarter Presentation
The standout reason the stock is rising in price and becoming more valuable daily is a result of the huge uptick in e-commerce demand from the coronavirus pandemic. Consumer buying preferences all over the world are now an online choice first. Going to the local store, if open for business, to purchase goods is now a second choice for billions of people. eBay is part of an e-commerce retail group expected to see a big uptick in viewership and final sales, as consumer shopping from home expands.
The company's online dominance in "resale" items, in my mind, puts it in an even stronger position going forward vs. new goods retailers. During an economic recession, individuals and businesses short of cash look to liquidate goods in a hurry. eBay is by far the easiest to use, largest marketplace for a recessionary garage sale across the globe.
I am modeling the potential of even greater gains in revenue, profitability, and free cash flow the rest of the year than management guidance. The primary reason, as I have discussed in past Seeking Alpha articles during late April and early May, is my projection the coronavirus problem is here to stay for a year or two. A stagnant economy for several years works in favor of eBay's platform for growth future, pure and simple. If my suspicion proves correct, 20-25% annual growth rates in "per share" revenue and income are coming in 2020-21 (not including the effects of a potential Classifieds sale).
Valuation and Margins
With all the moving parts, in terms of the business unit shuffle, it's hard to make clear valuation comparisons over the years. However, on price to trailing sales, cash flow and free cash flow generation per share, March-April was the cheapest point for new investment in at least three years. I have this situation pictured below.
The divestitures are a push to increase profit margins and returns on capital/assets, focusing on the core eBay website in the end. If the Classifieds division is sold for $10 billion or more, the company will reach for record margins by the end of the year, well above the improving picture below (post StubHub).
Technical Trading Upswing
Strong momentum is gathering for eBay shareholders in April-May. I have drawn a 12-month chart below of the upswing in some of my favorite momentum indicators alongside a now "outperforming" stock price. Since late January, eBay has gained +30% better than the S&P 500 market typical return, comparing the green circles on the chart. The red arrow points to a steady accumulation trend the past year in the Negative Volume Index (NVI). On falling volume days, plenty of buyers have bid up prices. The blue arrow highlights the powerful ramp higher in the On Balance Volume (OBV) line since late March. Basically, buyers have appeared on both high and low volume days. Taken together, the conclusion has to be bullish, from a technical perspective. How many other blue-chip stocks are up +15% year to date?
I am planning to purchase shares on weakness in my diversified long/short portfolio. I am projecting a solid period of outperformance vs. the market will be eBay's future in 2020-21. If we get another big market decline into the November election, just a flat return from eBay will be a win for my portfolio design. Given a rising stock market, eBay could reach $50-60 a share by December.
eBay is also a strong inflation hedge candidate. I am in the camp expecting stagflation, a rare economic condition of falling GDP output alongside rising prices for goods and services. Company performance could improve at a compounding rate, from more goods being sold at higher prices, capturing increased fees for listing on the e-commerce site.
The sale of the Classifieds segment may propel the stock quote much higher, as Wall Street is forced to revalue eBay as a super-strong margin/return business, on renewed growth and unique online assets. A reappraisal of the underlying business setup and improving organic performance could put eBay into the elite valuation class of the FAANG stocks. Specifically, I would not be surprised by a stock quote above $100 a share into 2022, if smart management execution combines with a bump in demand for eBay's resale and new retail e-commerce offerings. ($2.2 billion in free cash flow during 2020 moves to $3.1 billion at a 20% annualized growth rate into 2022. Valuations jump from 12.5x free cash flow today to 24x in two years, supporting a share price of $105.)
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