How Changes In eBay’s EBITDA Margins Impact Its Valuation
eBay (NASDAQ:EBAY) had a positive end to 2017 after a slowdown in revenue growth and a fall in margins in Q2 and Q3 of last year. Investors reacted positively, with eBay’s stock price surging from $35 in December to $44 by March, before falling slightly in recent weeks. We have a revised $37 price estimate for eBay, which is around 10% lower than the current market price following the rally.
eBay’s adjusted EBITDA margin has consistently declined from just under 40% in 2014 to 38% in 2016. However, the drop was steeper in 2017, with margins compressing by over 2 percentage points to 35.8%. There were two main reasons for this. First, eBay’s product development expenses increased at a faster pace than revenue growth. The company attributed this to development of its platform architecture and investments in key growth areas such as artificial intelligence, voice and image technology, virtual and augmented reality and distributed commerce. Secondly, general and administrative expenses soared 18% in 2017 after a 20% y-o-y decline in 2016. This was due to increased data, information security and employee-related costs as compared to a global workforce reduction program in 2016. Going forward, we expect the steep decline in EBITDA margin to normalize. However, if improvement in the company’s EBITDA margin happens sooner than anticipated, there could be an upside to eBay’s valuation.
We have summarized the upside scenario on our interactive dashboard platform, where you can modify assumptions such as changes in expected revenue or margins to see how they impact the company’s value. The image above shows one of the key steps in identifying eBay’s valuation sensitivity to changes in its EBITDA margin. We detail how changes in EBITDA margin impacts total EBITDA, which in turn impacts equity value and price estimate (assuming a constant EBITDA multiple).
See our complete analysis for eBay
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