Ebay, we’ve found, operates an auction business that generates recurring sales on the widest variety of products. Its auction model renders substantial cost savings that retailers do not generally enjoy. Because it is the market-leading auction site, sellers can find the buyer willing to pay the most, and buyers find the largest selection of goods available for sale. At some level, this may all be marginally interesting, but the typical investor is most interested in what this business is worth. Let’s get to it.
Valuations methods vary. Seth Klarman of The Baupost Group, in his Margin of Safety (Harper Collins, 1991), highlights the three methods of valuation he finds useful: a) going-concern value, which employs net present value (NPV) analysis of a business’ future cash flows, b) liquidation value, which prices the sum total of the business’ assets, as if its parts were sold and the business dissolved, and c) stock market value, which is the price at which a business and its subsidiaries would trade in the stock market (121-122). NPV analysis is best suited for evaluating profitable businesses with a consistently demonstrated earnings power; liquidation value works best for evaluating unprofitable businesses that retain assets of some value; stock market value makes sense when evaluating closed-end funds whose net asset value differs from their market value.
Given Ebay’s earnings power, NPV analysis is the best tool for determining the value of Ebay’s business. In future posts, we will offer a NPV analysis of Ebay’s cash flows.
For today, I thought it would be instructive and informative to quickly observe the portfolio of businesses that Ebay has acquired over the last decade and their acquisition prices. In itself, the price that Ebay paid for these businesses is not particularly useful for our valuation of Ebay as a whole. To tip my own hand a bit, I would argue that Ebay has overpaid for some acquisitions; thankfully though, it got a great deal on others.
Since 1999, Ebay has acquired the following businesses (and I will only list those acquisitions greater than 200 million)
Butterfield and Butterfield (1999) ~ 260 million
Half.com (2000) ~ 350 million
Paypal (2002) ~1.5 billion
Marktplaats (2004) ~ 290 million
Rent.com (2004) ~415 million
Shopping.com (2005) ~ 620 million
Skype (2005) ~2.6 billion
Stubhub (2007) ~ 310 million
BillMeLater (2008)~ 945 million
Other misc. small transactions (minimum cost of 600 million)
TOTAL COST ~ 7.89 billion
MARKET CAP of Ebay (as of 2/6/09) ~17.4 billion
In addition, another important acquisition for Ebay was a 25% stake in Craiglist in 2004 for about 13.5 million. The private market value of Craigslist could range anywhere from 2-5 billion, which would value Ebay’s stake in the range of .5 to 1.25 billion.
Most simply, we see that Ebay has a wealth of assets. Insofar as we can break out and separately value each of these parts, we should be able to come up with a sharper and better valuation.
Coming up next—Valuation, continued.
Disclosure: I, or persons whose accounts I manage, own shares of Ebay at the time of this writing.