However, this time around, we couldn't agree more with Barron's 8/1/09 cover story calling out eBay (EBAY, $21.25) as an excellent company and stock opportunity on an absolute and relative basis - link here. We first purchased EBAY in the mid-$20s last year and, like other investors -- including successful value investor David Winters of the Wintergreen Fund -- we were early (*Mr. Winters has since jettisoned EBAY, but at 6/30/08, his average cost was $29.49 per share). Happily, we were able to significantly average down as the stock tumbled into the low teens over the past year. The stock briefly traded below $10 for one day -- on 3/6/09 -- as chaos/fear was rampant.
The Barron's story correctly notes some of the reasons we still like eBay:
- "produces copious cash flow"
- "trades at a 20% discount to the broad stock market"
- "looks like a bargain relative to similar e-commerce outfits such as Amazon" (AMZN, $85.76).... "Last year, eBay earned about $1.8 billion on $8.5 billion of revenue. Amazon netted $645 million on $19.2 billion of sales."
- "in PayPal, an online-payments system, and Skype, an Internet-communications service, eBay has two unappreciated businesses whose growth is far outstripping that of many other technology-based services."
|DIRECT COMPETITOR COMPARISON|| |
|Qtrly Rev Growth (yoy):||14.50%||-4.40%||N/A||-4.40%||15.40%|
|Gross Margin (ttm):||22.57%||37.08%||N/A||72.13%||36.85%|
|Oper Margins (ttm):||3.78%||3.33%||N/A||22.90%||-1.60%|
|Net Income (ttm):||663.00M||83.95M||N/A||1.54B||N/A|
|PEG (5 yr expected):||2.3||2.01||N/A||1.15||2.30|
|BKS = Barnes & Noble, Inc.|
|Pvt1 = Columbia House Company (privately held)|
|EBAY = eBay Inc.|
|Industry = Catalog & Mail Order Houses|
|1 = As of 2008|
Below, we share a summary analysis we completed on eBay approximately one year ago, when the stock was at $26.75. You may notice that one of the bullets is similar to our j2 Global thesis: numerous competitive advantages protect high margin/ROIC business model. The numbers are NOT updated (if only we had more time), but the message remains the same:
eBay – World’s 6th Largest Retailer* is FCF Machine
* Based on information provided by eBay at 6/19/08 Shareholder meeting
Overview: eBay was founded in 1995 and provides global online marketplaces for the sale of goods/services (70% of 2007’s $7.7B net revenue), online payment services (25%), and online communications (5%)
- Marketplaces: e-commerce segment that enables auction-style and fixed-price trading; also includes classifieds Websites, Rent.com, Shopping.com, Stubhub, and advertising services; available on localized sites in 28 countries
- Payments: PayPal enables any party with an email address to securely send/receive payments in over 190 markets worldwide
- Communications segment: SKYPE offers free global voice and video calling (on network) and low cost calling to landlines/mobiles; available in over 34 languages
- Geographic revenue mix: 46% US / 54% International in 2Q08 versus 49% US / 51% International in 2Q07
- Concerns about slowing growth for Marketplaces and platform changes, competition, macroeconomic conditions
- P/E (2007A operating EPS) declined to 17x from 24x over same period versus three year TTM median of ~38x
- (1) Well-known brands with large customer base: eBay, PayPal, and SKYPE are becoming household names in many countries around world; 85M active Marketplaces accounts, 63M active PayPal users, and 338M SKYPE users
- (2) Unparalleled scale and margin profile: 2007 “Gross Merchandise Volume” (total value traded) of $59B (+13% Y/Y) places the company as the number six global retailer, just behind CostCo and Target, ahead of Sears; no real estate value for eBay, but operating margins are ~25% (GAAP) and ~32% (adjusted); Amazon’s 2007 revenue was $15B with 6% OM (adjusted)
- (3) Network effect: (1) and (2) drive (3) and are interrelated as eBay’s brand and broad reach yield incremental growth
- (4) Strong financial position: no debt and net cash to capitalization of >40%; 2008E free cash flow of $2.0B
- While historic multiples awarded during higher growth periods are unlikely (nor warranted), shares appear attractive given franchise characteristics that should command premium multiple; expect large share repurchases to continue -- $4.7B repurchased at average price of $30.48 over past two years, helping improve ROE/ROIC (17% / 28% for 2008E)
Disclosure: long JCOM, EBAY.
© 2009 Jeffrey Walkenhorst
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