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NerdWallet Scoreboard: eBay is a First-Rate Stock for Second-Hand Valuations

Investing, Investments

Thesis: eBay’s stock is conservatively valued at $43 per share relative to its peers.

Risks: New entrants competing against Paypal, notably the mobile payment app Square.

Catalysts: None.

Recommendation: Hold at current prices. Buy if it falls below $43 per share.

Downside: eBay’s Paypal business could be hindered by new competitors.

eBay (EBAY) posted solid quarterly results in both its Paypal.com payments business and its marketplace business. eBay revealed that for the quarter ended in September, 30 it has earned $597 million on $3.4 billion in revenue. Both the top line and bottom line were significantly higher than the same time of the previous year which was $491 million on $3 billion revenue. Sales from eBay’s primary marketplace and PayPal online payment business both rose from last year, increasing by 9% and 23% respectively.

Given this good news investors should consider what valuations would make eBay as a buy candidate.

Relative Valuations

eBay runs a payment and transaction business and a marketplace business. Its competitors in the payment space are credit cards like Mastercard (MA) and Visa (V) while its online marketplace competitors are Overstock.com (OSTK) and Amazon.com (AMZN). These stocks have wildly different valuations multiples:

Ticker

EV/EBITDA*

P/E*

EBAY

14.75

16.34

AMZN

47.8

2,706.55

OSTK

17.59

152.06

MA

12.81

27.04

V

14.08

44.93

*Valuation multiples from Yahoo! Finance 11.08.2012

eBay stock is obviously cheaper than its competitors on a price-to-earnings basis. This is great, but it is not sufficient to label eBay as a buy pick.  Since eBay is a combination of different businesses, we should try to compare each to its particular competitors. This requires some finesse because the reporting for its segments lack the line-item detail of the firm as a whole. Breaking up company-wide determinants of income like corporate-level costs and finance gains and losses (like interest) can be hard to assign to one business or another. On top of these issues, different companies are capitalized by different levels of debt and have different cash reserves set aside. Each firm may each be applying a different tax strategy, resulting in a different recent tax expense.

We can get closer to comparability by comparing enterprise value for capitalization and EBIT (earnings before interest and taxes) or EBITDA (earnings before interest, taxes, depreciation, and amortization). Enterprise value adds the value of a firm’s stock and its debt and subtracts the value of a firm’s cash reserves. This makes firms with different levels of borrowing are comparable. EBIT and EBITDA also obviate interest revenues or income since they are computed before interest. They also avoid tax strategy differences. These metrics help strip out a firm’s operations.

EV/EBITDA was also a convenient comparative metric because it is widely available for each of these firms. eBay does not appear to be cheaper than Mastercard or Visa on an enterprise value-to-earnings before interest, taxes, depreciation, and amortization basis. If we split eBay into payments and marketplace businesses, will it appear cheap in aggregate using the EV/EBITDA multiple?

Segment Breakouts

eBay reports results for three separate business segments: Marketplaces, Payments, and GSI. GSI offers online business solutions for ecommerce marketing and programming, so it is closer to the marketplace segment than the payments segment and has been grouped with it. (Since it is small, there isn’t much harm done here.) eBay does not report EBITDA by segment, but it does report operating income by segment. We can use the fraction of operating income reported for each segment as a proxy for segment-level EBITDA:

Segment

Operating Income

%

Projected EBITDA ($ Millions)

Marketplaces

2,730

68.20%

2,683

Payments

1,220

30.48%

1,199

GSI

53

1.32%

52

Total

4,003

1

3,934

 

Since we have estimated an EBITDA for eBay’s Payments segment we multiply it by a payments business EV/EBITDA multiple to estimate a fair enterprise value for this segment. To be conservative, we can apply Mastercard’s 12.9 EV/EBITDA which is lower than Visa’s multiple. This would estimate an enterprise value of $15.47 billion for eBay’s Payments business. The rest of eBay’s $59.45 billion enterprise value would be allocated to its marketplaces and GSI segments. Dividing their estimated enterprise value by their estimated EBITDA produces a multiple of 16.1:

Segment

EBITDA ($ Millions)

EV ($ Millions)

EV/EBITDA

Marketplaces

2,683

43,144

16.1

Payments

1,199

15,469

12.9

GSI

52

838

16.1

Total

3,934

59,450

15.1

 

This estimated multiple is lower than Overstock.com or Amazon.com, indicating that eBay’s marketplaces and GSI segments trade at a lower ratio than either firm.

However, today’s multiples are not low enough to constitute a 15% discount. If we discounted the EV/EBITDA ratios of Mastercard and Overstock.com and applied them to eBay we would generate the following valuations:

 

Segment

EBITDA ($ Millions)

EV ($ Millions)

EV/EBITDA

Marketplaces

2,683

40,119

15.0 (15% lower than OSTK)

Payments

1,199

13,057

10.9 (15% lower than MA)

GSI

52

779

15.0 (15% lower than OSTK)

Total

3,934

53,954

13.7

 

These valuations would require a roughly 9% drop in enterprise value and 9% drop from its recent $47.87 share price. Thus, eBay would be a buy at $43 per share.

Risk

This analysis makes the large assumption that it makes sense to compare eBay with the valuation multiples of its competitors, even though these companies all vary dramatically by company size (Overstock is much smaller) and stage of growth (eBay cannot reasonably be expected to grow at the same rate as a new or young company could).  This means we are not looking at an apples-to-apples comparison in which valuation multiples can be reliably used to look at the full story.

Conclusion

eBay is an attractive alternative to Amazon, Overstock, and Visa as a company that fuses payment and marketplace operations. Investors should watch for a price decline in eBay stock for a buy opportunity.