eBay due diligence and why I think the stock is undervalued in an expensive market

by miles_crotch

I’ve drafted up a somewhat short write up on why I believe eBay is a good buy at the current price. Any feedback is encouraged for missing points, disagreements, anything really. Hope you enjoy.

Bull Thesis

• Revenue growth in Q4 accelerated to 28% year over year and ~35% once you normalize for pending asset sale

• eBay has a sweetheart deal with Adyen, receiving warrants to purchase up to 5% of Adyen (Adyen is a $80B dollar company)

• eBay has been aggressively buying back shares over the past 3 years at very good price (37% of the shares outstanding have been bought back)

• eBay is selling off assets unlocking great value (Classifieds business $11B set to close in 2021)

• eBay has been paying off debt and refinancing for lower interest rates

• eBay returning capital to shareholders through dividends

Bear Thesis

• eBay is a stagnant boomer company used by my parents

• The company has been selling off some of their best assets (Stub Hub, Classifieds).

• Exceptional growth experienced in 2020 will reverse or at least slow drastically as the vaccine gets administered

Background

eBay Inc. operates marketplace platforms that connect buyers and sellers worldwide. The company’s Marketplace platform includes its online marketplace at ebay.com and the eBay suite of mobile apps. Its platforms enable users to list, buy, sell, and pay for items through various online, mobile, and offline channels that include retailers, distributors, liquidators, import and export companies, auctioneers, catalog and mail-order companies, classifieds, directories, search engines, commerce participants, shopping channels, and networks. The company was founded in 1995 and is headquartered in San Jose, California.

Over the past few years eBay has changed their business strategy to that of a mature company with stalled growth by refocusing on the core business, divesting non key assets and returning equity to shareholders through dividends and share buybacks. This all changed in 2020 with the worldwide Covid-19 pandemic causing a resurgence in eBay’s core business. The emerging growth and strategic plays taken by eBay have and will continue to unlock huge value for shareholders. Let me begin.

Revenue Growth

For a long time revenue was flat to declining at eBay, until 2020. Revenue growth on their core business accelerated to 28% YoY in Q4/2020, which excludes lost revenue from the sale of their Classifieds business. Organic revenue growth estimated to be closer to 35% if we were to normalize and remove Classified’s 2019 revenue. I do not think the market is properly pricing eBay as a technology company with accelerating revenue growth north of 30%.

eBay trades at under 5x revenue and 25x Free cash flow. These are very reasonable multiples, especially when looking at eBay’s peers. Etsy trades at 20x revenue while Shopify trades at 68x revenue (albeit these companies are growing faster). Amazon seems like a good comparison in terms of revenue growth rates and revenue multiples to eBay. However, Amazon’s gross margin is only 25% versus eBay’s 75% gross margin and EV to Free Cash flow at Amazon is twice that of eBay. Amazon is more of a traditional online retailer while eBay is a pure marketplace play, but why are they traded at the same revenue multiple? Other technology companies with similar revenue growth rates to eBay are trading at 20-40x revenue. This all leads me to believe that based on eBay’s core business, the eBay is priced at a discount relative to their peers.

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The bear argument would say that the 2020 growth is due to pandemic and things will shift back towards retail as vaccines are administered. This very well may be the case, but when we look at other companies that have this same accelerating growth during the pandemic (Etsy, Shopify, Lightspeed), these companies are priced at exuberate multiples. If we see continued upside in online buying as we live in ‘the new normal’, then eBay should see continued growth in share price as a result of both revenue growing and expansion of valuation metrics given the sustained growth.

Adyen Partnership

In 2002 eBay acquired Paypal for $1.5B. Back in 2002, 70% of eBay’s transactions were processed by PayPal. In 2015 eBay spun out PayPal. You are probably thinking so what PayPal processes transactions for eBay…not anymore. In 2020 the agreement between PayPal and eBay for processing transactions finally ended (5 years after spinout) and eBay started using Adyen for processing transactions. This partnership has many advantages such as eBay owning risk management (higher acceptance rates), and offering improved checkout features to optimize conversion (alternative payment methods). There are additional opportunities down the road that eBay could look into, like consumer financing, wallet, etc…. through their partnership with Adyen. These are opportunities that eBay could not previously do with PayPal as PayPal owned the payment data for customers at checkout.

But the best part of the deal with Adyen would be the economics. Although eBay does not say, I would be surprised if eBay did not receive discounted pricing from Adyen. A 10bps saving would result in $100m of savings each year, based on 2020 GMV. eBay also received warrants to purchase 5% of Adyen as part of the deal. Adyen is a $80B company. Those warrants have and will continue to print……ALREADY VALUED AT OVER $1B!!! Overall I am bullish on the partnership between Adyen and eBay.

Share Buybacks

Over 389 million (37% OF THE COMPANIES EFFING SHARES OUTSTADING!!!! ) have been bought back by eBay over the past three years. eBay used proceeds from disposing of assets and cash from operations totaling $14.6B and bought back shares at a very low price (~$37/shares versus todays $60/share). This was a great way to effectively return capital to investors and grow the company’s share price. When you look at the growth in eBay’s share price over the past three years it is almost entirely accounted for simply by these share buy backs.

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Debt Outstanding

eBay has $7.7B of debt outstanding. The debt is easily serviceable through eBays free cash flow (2020 free cash flow of $3.3B versus $300m interest expense). So you might think the story ends there, nope. eBay has paid off $3.3B of debt over the past 3 years. Again utilizing their cash from operations to improve their balance sheet. The story is not done yet. eBay’s management team has been doing a great job optimizing their interest payments as interest rates come down through refinancing debt at lower rates and paying off debt with high interest rates. In Q1 2021 eBay repaid a $750m note with a 6% interest rate (this was the earliest they were eligible to repay the note at face value). This alone should save the company $45m a year in interest expense.

Dividends

In 2019 eBay started paying a dividend of $0.14/share (about a 1% payout). Hey, dividends are nice and they attract a longer term stable investor.

Classifieds Sale

eBay is selling Classifieds business to Adevinta for a package valued at over $11B ($2.5B cash and Adevinta shares). They are losing only $200m of income from Classifieds business so the impact to free cash flow is 10% all while unlocking $11B of value.

StubHub

In February 2020 eBay sold off their StubHub business for $4billion in all cash sale. Could the timing of this transaction have been any better? Right before the pandemic, selling off a ticket resale business for large events….and using the proceeds from the sale to buy back shares of eBay at a depressed price. Long term eBay is losing a valuable asset, but I do not think they could have gotten a better ROI on these assets over how things played out.

Ownership

The stock does have a major ownership stake by Pierre Omidyar (founder) who owns 7% of the company. Since his departure from the board in 2020 he has been selling his shares. In Q4/2020 he sold 13m shares. As he continues to sell there could be some pressure on the share price, but in my opinion this is also a reason likely why the stock is still cheap. I expect Pierre to continue to liquidate as he focuses on philanthropy.

 

Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence or consult your financial professional before making any investment decision.

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