Why eBay’s Stock Has Taken A Beating In Recent Months
eBay‘s (NASDAQ:EBAY) stock has dropped roughly 20% since early March on a string of bad news and a management shake-up. However, we are still positive about the company’s long-term outlook and maintain our price estimate at $60, which stands at a premium of about 20% over the market. The decision to repatriate foreign cash, an online security breach and the departure of PayPal’s president have shaken the confidence of eBay’s investors, which explains the stock’s dismal performance. However, we believe that most of these issues are short-term in nature and the company’s image should revive over time. eBay has been performing well for the past few years, given the secular trend in consumer shifts to the Internet, strong growth in e-commerce and PayPal doing exceedingly well. We believe that its free cash flow can jump from an estimated $1.77 billion in 2013 to over $6 billion by 2020, growing at a CAGR of roughly 20%.
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Several Events Shook Investor Confidence
Earlier this year, eBay announced its decision to repatriate foreign cash. U.S. companies typically park a large chunk of their cash balances overseas to avoid repatriation related taxes unless they really need it. eBay’s move signaled that the company was badly in need of funds, to the point that it didn’t mind paying a huge amount of taxes on it. This made investors a little wary. Additionally, eBay’s online security was breached in a cyber attack which compromised user information including names, usernames, passwords, email addresses, phone numbers and dates of birth. The fact that eBay was a specific target negatively impacted the company’s image and public relations.
Adding to this, the shake-up of PayPal’s top management wasn’t comforting to investors either. The departure of PayPal’s president came as a surprise to investors, shaking their confidence in the company’s fastest-growing business segment. Compared to the marketplaces segment, which saw growth of roughly 12% in 2013, PayPal increased its revenues by 18.5% during the same year. eBay has long emphasized the advantage of PayPal and marketplaces business working together and the synergies that arise from it. The management shake-up raises doubts on the ability of the two units to work coherently.
However, There Is Much To Cheer About
European Business Remains Robust
eBay’s international revenues jumped from around $4.6 billion in 2008 to more than $8.3 billion in 2013, a CAGR of 12.8%. [1] The last three years have been especially rewarding, as growth was much higher than the overall five-year CAGR. Germany and the United Kingdom together accounted for about 49% of eBay’s international revenues in 2013, and close to 26% of its global revenues. Both markets grew at a similar rate of 15-16%, whereas the company saw its revenues from the rest of the world jump by 13%. This all-around growth is an encouraging sign as it reduces eBay’s dependence on a single market.
Given that the Eurozone and the U.K. are gradually coming out of recession, we expect eBay to benefit from some economic tailwinds as demand improves. We believe that eBay will continue to focus on expanding its international presence and lay greater emphasis on PayPal’s growth in emerging markets
Growth In E-Commerce And Mobile Focus
In Q1 2014, eBay enabled $58 billion of commerce volume, which represented an increase of roughly 24% over the first quarter of last year. [2] This growth was driven by its focus on mobile, cross-border trade, especially in China, and the symbiotic relationship between eBay’s marketplaces business and PayPal. The company enabled about $11 billion of mobile commerce volume during the quarter, which accounted for roughly 19% of total enabled commerce volume. In this regard, we believe that eBay is doing at least as well as Amazon (NASDAQ:AMZN) or possibly even better, as the latter reportedly earned roughly 5% to 8% of its revenues from the mobile platform in 2012. [3]
According to eMarketer’s forecast, global business-to-consumer e-commerce sales are expected to jump by roughly 20% in 2014, amounting to $1.5 trillion. [4] This expected growth is higher than what the industry saw last year, and much of it will be driven by the continued uptake in mobile usage in emerging markets, expansion into new regions and advancements in payment and shipping services. We believe that eBay will continue to benefit from these tailwinds and achieve its 2014 targets.
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- eBay’s SEC Filings [↩]
- eBay’s Q1 2014 Earnings Transcript [↩]
- Eight Percent of Amazon’s Sales Are Coming From Mobile, AllThingsD, Jan 4 2013 [↩]
- ECOMMERCE, Q1 2014 Forecasts and Comparative Estimates [↩]