EBay: An Opportunity To Buy At Lower Price Levels?

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Over last one year eBay’s price has remained at same levels giving investors a negative return of -0.1% in spite of Q3 2013 revenues jumping 15.2% and profits going up by 15.4% on a Y/Y basis. In comparison, its industry peers Amazon and Overstock have gained 52% and 78% on a revenue growth of 22.5% and 16.5% respectively. We examine whether the stock is being penalized by investors due to slower growth prospects, or it is an opportunity for the long term investors of eBay to buy at current price levels.

eBay’s performance so far

eBay’s revenues have been growing at an average compounded annual growth rate of 18% for past 3 years with an impressive net income margin of 20% for the same period. eBay had reported revenue of $3.9 billion for Q3 2013 with a net profit of $689 million and an operating cash flow of $1.3 billion. eBay’s expected growth potential along with its consistent ability to convert its revenues to profits will continue to derive value for the company.

eBay has been maintaining a double digit revenue growth for last three years. Though the growth dipped in 2013, we expect the revenues to increase in the coming years. Expected revenues are based on 2015 revenue guidance of $21.5 to $23.5 billion as shared in eBay’s annual stockholders meeting. Interpolating these numbers over next two years, we are looking at a growth rate of 17%-20% each year. We believe there is a realistic chance that eBay will achieve these numbers.

ebay Revenue Growth

Source: eBay SEC Filings

eBay derives revenues from two key segments: eCommerce (Marketplace) and Payments (PayPal) with Enterprise and others contributing very small percentages.

ebay segmental analysis

Source: eBay SEC Filings

Segmental Analysis

PayPal is a dominant presence in its segment with 137 million active registered users. In eCommerce, eBay is second only to Amazon. PayPal is also said to be the most successful acquisition in the industry in terms of integration and the synergy has helped eBay broaden its marketplace to high levels. In Q3 2013, out of $20.1 billion GMV in marketplace, $13.1 billion were transacted through PayPal. Last year, eBay sold off Skype, which was probably unrelated to its core activities, gaining $1.4 billion.

PayPal currently generates 40% of eBay’s revenues. It has been continuously growing at double digit revenue growth rate with an annual 3.7% average take rate, which is the commission on the total transaction value.

We expect two main revenue drivers for the PayPal segment going forward,

  1. Mobile: PayPal expects $20 billion in mobile transaction volume by the end of 2013. This is expected to be achieved after the integration of its recent acquisition-Braintree. PayPal’s special focus on mobile, especially with the accelerating growth witnessed in mobile segment, will be the key strategic growth driver for eBay.
  2. Users: According to a survey by comScore, PayPal is known to 72% of online shoppers with 48% actually using the digital wallet, way above its competitors-Google Wallet at 8%. PayPal still has scope to increase its penetration among small retailers to widen its market.

These factors will boost the growth to above 20% going forward. However, emerging threats like ‘Amazon’s Login and Pay’ and ‘Google wallet’ can affect PayPal’s growth and profitability in future.

Paypal Users and Revenue

Source: eBay SEC Filings

Marketplace

Marketplace contributes 53% of eBay’s revenues currently. Though in e-commerce, Amazon is higher in term of market share and revenue growth, eBay is quite successful in terms of profitability with Amazon earnings almost non-existent. One important thing to note here is while Amazon reports revenues as the total merchandise sold, eBay reports revenues incorporating only the commissions generated from the merchandise sold. eBay’s Gross merchandise volume (GMV) increased by 10% on a Y/Y basis in the third quarter of this year, while its revenues went up by 16%.  As said in the current quarter’s earnings call, the company expects ecommerce volume to reach the level of $300 billion by 2015, up from $175 million in 2012. Given the segment’s healthy profitability the eCommerce expected growth will help eBay to maintain sustainable profitability.

The key concern here is the Q4 2013 guidance given by the company, which expects a sluggish growth in marketplace revenues leading to total revenues on the lower side of the 2013 full year guidance of $16 to $16.5 billion. Also, high competition in the segment can hurt its growth prospects.

ebay marketplace GMV and take rate

Source: eBay SEC Filings

eBay Cash and Debt Analysis

eBay’s net cash balance and short term investments excluding debt stands at $6.108 billion. The huge cash balance gives the company the leverage to invest in product development and acquisitions. However one interesting fact to note is eBay’s Bill Me Later services. It offers deferred payments and financing services through the medium of a third party-bank. Later, eBay “purchases” the loan receivables from the bank, which makes eBay the indirect “lender” to its users. In effect, eBay is exposed to the credit risk of the short term loans and other risk associated with financing. Last quarter, Bill Me later had a total payments volume of $1 billion representing a penetration of 4.3% in the US and 2% worldwide of merchant transaction revenues. Also, net charge offs (default rate) currently stand at 5.5% annual rate relative to average loans receivable. Despite having a cash safety net, it would be matter of concern if the charge offs were to increase, amid weaker US economic outlook.

Earnings Surprise History

The positive earnings surprises for three out of last four quarters seem to have gone unnoticed by many investors, with the stock price registering no gain in last one year.

eBay Valuation

eBay is currently trading at a price to earnings ratio of 19.78, based on last twelve months non-GAAP earnings. The ratio is lower as compared with its peers (Amazon: 1374.6, Overstock: 26.1). The last twelve months revenues of eBay have grown by 15.2%, while stock price for last one year have decreased 0.01%. The stock price is yet to reflect the growth in revenues. In comparison, Amazon and Overstock stock price have more than compensated for their respective revenue increase, as show in the table below.

Competitive Analysis

EBAY AMZN OSTK
Change in price(last 1 year) -0.01% 51.97% 78.11%
Growth in LTM Revenues 15.2% 22.5% 16.5%

Source: eBay SEC Filings

We next try to calculate the fair value per share for eBay. The table below shows the steps to calculate eBay’s valuation. We assume that the earnings will grow at 15.5%, a midpoint of 14%-17% guided for 2015. Applying the current PE ratio to the 2015 expected earnings, we get the expected price of $71.1 per share in 2015. Discounting this with 8% (assuming 8% as minimum required return by investors), we get the present value per share as on today at $61.012 which is 18.8% above the currently trading price of $51.37 on December 12, 2013.

Relative Valuation

Current P/E ratio (based on LTM non-GAAP earnings) 19.758
2013 non GAAP earnings 2.7
2015 expected earnings (using 15% as given in guidance) 3.602
Expected price in 2015 using current PE ratio 71.165
Discounting the expected price at 8% to compute current fair price 61.012
Current price 51.37
Upside potential 18.8%

Source: eBay SEC Filings

Keeping in mind eBay’s future growth prospects, we believe that eBay has been under-priced by 18.8% at current price levels and this gives the long term investors of eBay an opportunity to purchase the stock at current price levels.

To see EBay’s latest stock price movement, click here (NASDAQ:EBAY)

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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