eBay (EBAY) is one of the web’s tried and true consumer websites, maintaining Half.com, Rent.com, and Shopping.com, in addition to maintaining a small investment in Craigslist. Much of its room for growth, though, comes from PayPal, the payment system that is ubiquitous on the web and beginning its entrance into the in-store retail market. Hedge fund managers Eric Mindich, Al Gore, Ricky Sandler, and John Thaler are among EBAY investors.
In March 2011, eBay purchased GSI Commerce for $2.4 billion, an acquisition that comes six years after its take-over of Skype for a similar selling price in 2005. The GSI Commerce purchase positions eBay to make headway with a large number of retailers like Toys “R” Us, Aéropostale, and Kenneth Cole, whose websites eBay now manages. Along with updates to its PayPal interface, the company is positioning itself to see share prices reach their highest points in over five years.
eBay shares are presently trading near their 52-week high of $42. The valuation story for eBay is complex because there is really no direct comparison for the company’s model—it has both significant financial service products and retail businesses. In all, the company is normally valued according to its price/earnings multiple of 16, which is within the inner three quartiles for the information technology sector, and the company’s price/cash flow of 13 is also around the S&P sector average multiple.
Against eBay’s past figures, the valuation story is a little more enlightening. eBay’s EV/EBITDA is around 14, which is around the company’s average over the past four years. However, this is well below the company’s EV/EBITDA over the first half of the past decade. As detailed below, significant earnings growth, along with the expanded PayPal interface, will help eBay realize price growth in the short term..
Google Wallet, Visa, and PayPal
There is plenty of competition for services that collect customer payments online. Google’s (NASDAQ: GOOG) Wallet platform is now available at a variety of online retailers, while Apple (NASDAQ: AAPL) is setting to challenge some of this with Passbook, an all-in-one application that collates payment information on mobile devices. Additionally, Sprint (NYSE: S) is introducing yet another competitor in the internet financial service sector called Touch Wallet. This is not to mention Visa (NYSE: V) and other credit card companies, which are implementing tap-and-go stations at many retailers in order to give card use the “wireless” feel.
How does PayPal stack up? To begin, the platform already has a large online presence as the first major online payment option. It has remained a fresh option for many consumers, and its website is about to undergo an update, making it more intuitive and pleasant to look at—a former shortcoming of the service that other startups such as WePay have tried to exploit. Additionally, eBay reports that 20 major retailers will be installing PayPal payment interfaces in 2012, allowing the service to be used at the point of sale. PayPal Here, a wireless mobile app and reader, allows small business owners to collect from customers remotely for a 2.7% transaction fee. The company reported on March 15 that it has signed up over 200,000 merchants. In all, recent performance of PayPal has also exceeded expectations. PayPal’s margin increased to 26.4% for the first quarter 2012, up 4% year-over-year.
The Online Marketplaces
As the main driver of its business, eBay controls a variety of marketplaces. The company’s EBITDA profit margin was 48% for 2011, and a favorable year could see it increase to 50% in 2012. This would mean a break in the downward trend in margins from 2008 onward, when EBITDA profit margins peaked at 54%. eBay.com remains the company’s major source of profitability and value. The average commission rate (take rate) on transactions from the website has been 7.8% over the past year, though this number is falling. Going forward, both the long-term downward (or level) trend in profit margins and take rate means that eBay needs to increase its overall sales volume and value of items sold while exploring other sources of earnings growth.
eBay is doing well in executing on both of these fronts. First, improving macroeconomic conditions—assuming that a favorable resolution to the Euro crisis occurs—mean that prices for the items sold on eBay will rise. The average price for eBay-listed merchandise is in the low $60s, and an improving economy will likely lead to a price growth of $2 over the next two years. Second, eBay has generated greater user volume. Year-over-year, there are 7% more active users on eBay.com, and with this has come a 17% increase in items sold. Improvements in the user experience of website are largely responsible for this, in addition to a better economic climate. Finally, as noted above, eBay consistently looks for new ventures, acquisitions, and market niches to bolster its profitability.
Amazon (NASDAQ: AMZN) remains the major competitor for just about any online retailer, offering free shipping and practically any consumer product imaginable. To compete with this, eBay has increased the number of orders on the website that ship for free by 16% year-over-year in the first quarter 2012. Additionally, eBay has focused on certain businesses like fashion and automotive parts, taking the specialist tact over the super-generalist Amazon strategy.
The investment grade of eBay as a long-term investment is quite high. The company has a debt/capital ratio of 10%, relying on very little debt to finance its operations. eBay also holds 24% of its total assets in cash and short-term investments. Management has done an excellent job of returning value to shareholders, having bought back 7 million shares in the first quarter 2012.
In a sector in which some companies have long since come and gone, eBay is one of the longstanding giants of the field. eBay is a safe short-term buy—I expect shares prices to continue their upward trend—but it is an attractive option as a long-term tech stock. Though plenty of competition exists on both its marketplace and financial services fronts, eBay management continues to carve its niche in these areas and consistently delivers excellent results.