While The PayPal Separation Will Close In July, We Maintain Our Price Estimate For eBay

-7.45%
Downside
52.78
Market
48.85
Trefis
EBAY: eBay logo
EBAY
eBay

In a recent update, eBay‘s (NASDAQ:EBAY) board of directors finally approved the completion of planned spin-off of PayPal business. The separation is scheduled for completion on July 17th, after which PayPal will trade as an independent entity on Nasdaq under the symbol ‘PYPL’ starting July 20th. The company’s shareholders will receive one share of PayPal for every share of eBay’s stock that they own.

We continue to reiterate a price estimate of $59.12 for the company’s stock, which is almost at par with the current market price. This is based on the view that eBay could see continued traffic-related headwinds in the near-term. Moreover, over the longer-run, we expect eBay to somewhat lag the overall e-commerce market, owing to rising competition from both e-retailers as well as brick and mortar retailer giants such as Walmart and Target. On the other hand, the company could continue to generate healthy cash flows, owing to its high-margin business model. Hence, while our valuation reflects the challenges to continue for eBay in the coming years, the company could continue to produce strong cash flows, which along with potential asset sales (eBay enterprise),  could lead to an increase in share buybacks.

See our complete analysis for eBay

Relevant Articles
  1. Up 19% YTD, Where Is eBay Stock Headed?
  2. Trailing The S&P By 20% This Year, Can eBay Stock Rebound?
  3. Down 4% YTD, What Should You Expect From eBay Stock?
  4. eBay Stock Is Down 7% YTD, What’s Next?
  5. What To Expect From eBay Stock?
  6. eBay Stock To Post Mixed Results In Q1

Key Challenges Impacting The Marketplaces Segment: The revenue growth in the eBay’s core marketplaces segment has consistently come down over the past few quarters — annual top-line growth (in FX-neutral terms) slipped from 9% in Q1 2014 to 3% in Q1 2015. This has mainly been caused by traffic-related challenges owing to last year’s security breach and the Google Panda update. The company continues to face friction because of its safety measure of asking all users to change their passwords (which was taken last year), post a security breach that was detected by the company. Additionally, the company has lost out on search engine traffic as it was penalized by Google for issues such as inadequate quality of content on product listings and poor management of paid-search strategies. Significant appreciation of the U.S. dollar has further affected both year-over-year growth rates in dollar terms, as well as the company’s cross-border trade business (in which U.S. is positioned as a net exporter). Finally, seller policy changes at eBay have caused significant dissatisfaction among sellers, leading them to migrate to other marketplaces. All these factors could continue to weigh on eBay’s growth in the near-term.

Steps Being Taken To Address These Challenges: eBay is trying to circumvent these challenges by taking multiple steps. Firstly, the company has prioritized a long-term approach to search-engine-optimization (SEO) management, by structuring product listings into catalogs. However, since this transition involves manual processes, we expect these efforts to take a long-time to complete. Also, the company has stepped up its focus on both SME (small and medium enterprise) as well as consumer sellers, by improving its data analytics tools and making it easier to list products on the platform.

On the consumer side, the company aims to enhance its focus on core shoppers and deals business. Also, it aims to improve its customer experience by launching new apps and providing new features. In addition, eBay plans to enhance its focus on certain key categories and diversify traffic sources to include social and messaging platforms. While encouraging, we believe these efforts could take several quarters to yield results in the face of intense competition from other online retail players.

Trefis Take On eBay’s Future Growth: eBay’s management forecasts FX-neutral top-line growth in the marketplaces at 0-5% during both fiscal 2015 and fiscal 2016. We expect demand to remain subdued in the near-term, with currency-neutral growth to trend in the low-single-digits during this period. However, the growth could somewhat pick up pace in 2016 on the back of softer year-over-year comparisons. Longer-term, we expect the transaction growth rate on eBay to trail the overall e-commerce market, as we expect incumbents like Amazon and Alibaba to win market share from the company over our forecast period. Having said that, the business will continue to generate healthy cash flows owing to its high margin and mature business model.

Our $59.12 price estimate for eBay’s stock is marginally below the current market price.

View Interactive Institutional Research (Powered by Trefis):

Global Large CapU.S. Mid & Small CapEuropean Large & Mid Cap
More Trefis Research