Description

eBay was last written up three years ago, and after substantial subsequent appreciation, the stock retreated this year and is now roughly 20% higher than it was three years ago. Since that time revenues have increased, but EBITDA has been roughly flat at $3.5 billion as margins have compressed. Valuation is fractionally higher than that at that time, as the stock price is 20% higher, but the company has repurchased about 10% of the outstanding shares.

A few developments make the stock interesting at current price levels. The first is the company’s decision to move its payment processing in-house from PayPal over the next three years (with the assistance of Adyen). This has two benefits. The first is that Ebay received a five percent stake in Adyen, currently worth $800 million. The second is that eBay will earn some of the processing spread that previously went to PayPal. The street estimates that the net realizable spread is between 0.5% to 1% of $85 billion of gross merchandising volume (GMV). That represents roughly $600 million of incremental EBITDA at the midpoint.  Capping the value at 8x and discounting back from 2021, I estimate payments is worth $3 to $4 per share by year end 2019. I’ve attached a little more detail on payments math at the end of this note.

In addition, eBay is beginning to allow sellers to advertise to increase visibility on the site. Other marketplaces monetize more than 2% of GMV as revenue. Assuming 2% as a medium term target for eBay implies a potential revenue lift of $2 billion, or 20% of the current sales base. Some of this lift is already in 2018 estimated revenues, so I assume a three year forward revenue lift of around $1.5 billion, or about 5% revenue lift per year. This should be high margin business, providing a high single digit lift to EBITDA. Assuming a cumulative lift to EBITDA of $600 million over three years, the math would be similar to payments, worth $3 to $4 per share by year end 2019.

Another interesting aspect of eBay is that roughly 20% of the company’s revenue today comes from international classified advertising and StubHub (split about evenly between the two). These should also be higher margin businesses. For reference, Schibsted, who owns an international classified business similar to eBay’s, generates ebitda margins ranging from mid 30s to mid 50s across its footprint. StubHub’s take rate (the commission it charges sellers), is almost 3x that of eBay, at 22% vs. 8%, and I would also guess that the average ticket price is higher than eBay’s overall average revenue per transaction (estimated at $46 by Morgan Stanley). That implies StubHub’s revenue per transaction is at least 3x that of Ebay marketplace, and as such should be substantially higher margin.

If I assume Classified at Stub Hub combined earn EBITDA margins of 46%, as compared to total eBay margin of 34%, it implies 2018 EBITDA for those businesses of $1 billion or 28% of total company EBITDA. Those businesses should also grow faster than core eBay over time, and should have more operating leverage, so their percentage contribution to overall EBITDA should rise going forward. Schibsted trades at a low 20x EV/EBITDA multiple, but one could argue that a) that multiple is high, and b) Stub Hub results fluctuate with the event cycle, so its multiple should be lower. That said, I think most would agree these are high quality, capital light businesses and should trade more or less in line with other growing internet platforms. I think a mid-teens EV/EBITDA multiple is reasonable. That implies value for these assets of roughly $15 per share.

Finally, pro forma for the sale of Flipkart, eBay currently holds about $500 million of net cash (taking into account marketable securities). They should generate close to $2 billion of cash over the balance of this year, and more than $2 billion in 2019 (much of this cash will be reinvested in shares). Subtracting out $500 million of stock based comp issuance which is zero sum against share repurchase, the company should still end 2019 with about $4 of net cash or comparable retirement of shares over the next eighteen months.

Taking it together, we have a year-end 2019 value of:

Classifieds / Stub Hub: $15

Payments/Advertising: $6

Net cash and cash accumulation / share buyback: $4

Total $25

That leaves the core eBay marketplace valued at $9 billion. Core eBay marketplaces are estimated to generate about $2.5 billion of EBITDA this year, implying a current multiple on this piece of the business slightly below 4x EV/EBITDA. Even if one includes payments and advertising as part of core, and ascribes them no breakout value, the pro forma valuation is $15 billion, putting the core multiple at only 6x EV/EBITDA.

I’d argue that is too low. The company has been able to grow its top line amidst intense competition from Amazon and other vertical online merchants. Even as they have ceded ground in core verticals like used cars, they have found ways to offset the loss by expanding verticals like auto parts. In addition, in certain international markets like Australia, Amazon has had more difficulty getting traction and eBay has loyalty programs which should make its customer base stickier than in the US.

The company also remains differentiated from Amazon in many of its core areas including used, refurbished, and collectibles. While Amazon offers many of these products, head to head comparisons suggest that it tends to have less inventory and higher prices.

In addition, over the next few years the high quality classified businesses and Stub Hub should grow as a percent of total eBay, providing a further tailwind to valuation. The company may also add to these businesses through tuck in acquisitions.

Putting it all together, I think you could easily have a $50 stock in three years - $20 for Stub Hub and Classifieds, $8 per share of cash, and core eBay generating north of $3 billion of ebitda and valued at around 7x EV/EBITDA. That represents 60% upside over three years, a 16% annual CAGR.

The big risk to all this would be if the core eBay platform is about to materially inflect downward. If that happens, not only do the economics on the core business worsen, but the areas of value – payments, advertising, and cash build, all contract. I think eBay management is acutely aware of this risk, and as a result is investing more heavily in the customer experience. It appears they will give up margin today to hold their core seller/buyer network, recognizing the monetization opportunities going forward on that network. I think this is the right strategy.

Other risks include weakening performance for the classified listings, which face competition from Facebook Marketplace or StubHub, which faces competition from Ticketmaster’s resale business. Indeed StubHub 1Q results were soft and are expected to remain so through the year, although that has been blamed on a weak event landscape.  Ticketmaster has had a secondary ticketing operation for several years without a clear negative impact on StubHub, and StubHub has first to market advantages in terms of the size of its seller base and customer base. I have run a few recent comparisons for popular events in my area and found better inventory and price on StubHub (another reseller, VividSeats, had even fewer seats for the events I looked at). That said, Ticketmaster (owned by Live Nation) has other revenue sources, and could continue to throw money at this business to gain more traction.

It’s also entirely possible the company flubs the roll-out of payments, but I get some confidence from that fact that they already handle about 20% of transaction volume in house, and further roll-out will be gradual. That said, payment economics might not yield the 50bp to 100bp spread modeled by the street. There are similar risks around advertising, ie that monetization are lower than hoped for.

Payments math:

At present eBay sellers pay just over 4% to PayPal for an average transaction ($100 sale). eBay will reduce this payment closer to 3% per transaction, thereby providing better economics for sellers. eBay will bring the processing and fraud costs in house, which are estimated to represent a little over 2% of transaction value, earning between a 50bp and 100bp spread. For conservatism I assume a 60 bp spread.

Note that eBay already processes about $20 billion of its gross merchandising volume (GMV) in-house, the GMV subject to new economics in 2021 will be roughly $110 billion of GMV less $20 billion, or $90 billion.

Assuming the company earns roughly 0.6% on GMV processed in-house implies incremental operating income of $540 million. This is a healthy lift relative to current EBITDA of $3.5 billion. Using EBAY’s EV/EBITDA multiple of around 7x – 8x (adjusting for classifieds, it implies about $4 per share of equity value, or $3 per share in 2019 (discounted back two years at 10%).

Catalyst

Ramp up of payments roll-out in 2019, growth of advertising sales, continuing growth of classified and StubHub, share repurchases.