Tag Archives: Valuation

eBay’s “Problems”

The cacophony of eBay critics have been talking down the company’s value for over a year. The voices worry aloud about lower gross merchandise volume (GMV), lower auction revenue, and fewer eBay stores. I am not Pollyannaish; these are real concerns that portend real trends. But investors need to keep their eye on the ball. Will these concerns materially erode the business? What will be their likely effect on eBay’s free cash flow?

A few points. Critics often fixate on the worst number that they can find (often related to sales), rather than the most relevant (in my lights, free cash flow). For example, in the latest quarter (Q408), eBay’s marketplaces business unit (which excludes Paypal and Skype) recorded $1.27 billion in revenue, for a 16% YOY decline. Ah, woe, the sky is falling!

This is a big number, but two important caveats are essential for our analysis. First, a huge chunk of the drop in GMV (over a third) is a result of falling GMV for vehicles. Everyone knows that new auto sales are down nearly 50% YOY. Comparatively, eBay’s vehicle GMV was down 30%, or about $1 billion YOY. A second caveat—over half of eBay’s marketplace revenue is international. During the fourth quarter, the U.S. dollar increased significantly relative to most currencies. In their quarterly conference call, Bob Swan, eBay’s CFO, noted that excluding currencies and excluding autos, GMV in the core marketplace business was down 4%.

I would contend that a 4% decline in the core marketplace business, considered in itself, is not particularly significant for valuing the whole of eBay as a business. Active users at eBay increased 4% year over year. Active registered accounts at Paypal and Bill Me Later were up 23% YOY. The number of items sold were up 3% YOY. More customers bought more items, but at lower prices.

It is too soon then to conclude that eBay’s core marketplace business is in serial decline. Despite a terrible fourth quarter for retailers around the world, eBay’s annual free cash flow and earnings were up YOY. As the recession persists, and even if it deepens, eBay should weather the changes as well or better than its competitors in ecommerce. As we’ve seen, the 2008 numbers simply don’t show a significant problem in its marketplace business. But be assured, we’ll keep watching…

Coming up next—eBay’s “Problems,” Cont’d.

Disclosure: I, or persons whose accounts I manage, own shares of eBay at the time of this writing.

Ebay as a Bond

Yesterday we valued Ebay as a profitable business that will produce moderately increasingly cash flows over time, by using a NPV analysis of those flows. However, as you may notice from the links on the sidebar, there are a fair number of bears out there who find Ebay’s business stagnant and the stock overvalued.

So, to assuage the worries of the most pessimistic investor, I propose that today we value Ebay as if the company itself were a bond and its future cash flows would consistently pay out at the same rate of 2008—that is, 2.32 billion.

Two decades of 2.32 billion “pay-outs” would return 46.322 billion. Of course, we wouldn’t be willing to pay 46 billion today for that amount to dribble back to us over twenty years. Keeping yesterday’s discount rate of 15% (our desired return), we should be willing to pay 14.497 billion today for those “pay-outs,” plus the current book value of the company (11.08 billion as of 12/31/08). In sum, $19.49 per share.

Let’s say you are still worried about your valuation of your Ebay “bond.” If you add a 25% margin of safety, that means you should be willing to buy the Ebay “bond” today for $14.62, providing even more cushion for your 15% expected return. Today, Ebay closed at $13.35.

To assume no growth for a premier company with a demonstrated love for acquisitions strikes me as unreasonable. Such an assumption also implies that Ebay’s cash flows will decline relative to population growth and inflation. Even if these highly unlikely scenarios came about, buying Ebay today should still generate an above average return on capital for a long-term investor.

Coming up next—Relative Valuation.

Disclosure: I, or persons whose accounts I manage, own shares of Ebay at the time of this writing.

Ebay–What’s It Worth?

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.