Payments revenue was up 32% Y/Y through 9M’08, and we are projecting 22% growth in F’09 as the off-eBay side of PayPal remains a key growth contributor; additionally, we expect a slight
Trang 1eBay, Neutral, ($13.96)
We are maintaining our Neutral rating on eBay We believe weakness in usage and conversion, as well as a more competitive broader eCommerce market, present challenges that will make it difficult for eBay stock to outperform in the coming months Our 12-month price target is $17
• Marketplaces usage metrics point the wrong way ComScore data indicates that the number of US users coming to eBay’s sites declined 17% Y/Y in the three months ended 10/08 We believe the decreased usage and difficulties in optimizing the search algorithm have resulted in significant weakening of conversion for eBay listings These factors are offsetting the gains from revitalized listings growth on the platform
• Are online auctions a mature market? Auctions traffic has been anemic, as we
believe a more mature eCommerce market is increasingly driving buyers to expect a top-flight user experience and an ability to order items, especially new items, immediately We think this shift presents a challenge to eBay: auctions are
a near-monopoly for the company, whereas consumers seeking immediate
purchases have a wealth of options, of which eBay is only one
• PayPal unit remains a prize asset Payments revenue was up 32% Y/Y through
9M’08, and we are projecting 22% growth in F’09 as the off-eBay side of PayPal remains a key growth contributor; additionally, we expect a slight benefit as the impact of the Bill Me Later acquisition is folded in
• 2009 drivers In our view, the following factors will drive shares in 2009: (1) changes in Marketplaces conversion driven by better search, (2) corporate structure changes such as a sale of Skype, and (3) the impact of any credit market developments on the receivables book at Bill Me Later
• Maintaining 4Q’08, F’09 estimates We are maintaining our 4Q’08 and F’09
revenue, EBITDA and EPS estimates; we are introducing new F’10 estimates; all these are summarized in the table below:
Table 102: eBay Financial Snapshot
$ in millions, except per share data
JPM
EPS $ 0.38 $ 1.69 $ 1.75 $ 1.99 10% 4% 14%
Consensus
EPS $ 0.40 $ 1.70 $ 1.65 $ 1.74 11% -3% 6%
Source: J.P Morgan estimates, Company data, and Bloomberg
Trang 2Key Financial Metrics and Estimates
The following tables summarize our revenue forecasts by business segment, as well
as our estimate for Y/Y growth in key business metrics
Table 103: eBay Revenue Forecast by Segment
$ in millions
Gross Merchandise Volume (GMV) $59,353.0 $60,838.0 $60,975.3 $66,861.6
Total transactions: $6,519.4 $7,157.2 $7,807.9 $8,729.8 eBay online revenue $4,680.8 $4,773.6 $4,901.2 $5,323.5 Payment revenue $1,838.5 $2,383.7 $2,906.7 $3,406.2 Marketing Services Revenue: $788.4 $1,011.0 $1,128.7 $1,300.3 Marketplaces $683.1 $901.2 $1,016.2 $1,177.9
Communications $17.3 $24.5 $28.5 $32.7
Source: Company reports and J.P Morgan estimates
Table 104: eBay Auction and Payments Metrics Forecasts
Auctions in millions
2007 2008E 2009E 2010E
Marketplaces Revenue/Listing $2.00 $1.73 $1.60 $1.62
Total # of Payments 731.2 875.0 996.9 1,120.1
Source: Company reports and J.P Morgan estimates
Our Estimates and Outlook for 2009
We believe the company’s focus on the buyer is well-placed, and several of the measures taken by management, including the DSR system, are a step toward improving the buyer experience on the site At the same time, we believe F’09 will present continued challenges in (1) improving the appearance of items on the sites and (2) fine-tuning the search and finding functions to better put the right items in front of users
We think eBay is likely to continue making some modifications to its fee structure in order to spur the necessary changes and in order to help keep sellers afloat in a tough environment We think these operational concerns, as well as macro challenges and
an FX headwind, will drive flat Y/Y GMV growth and a 3% increase in Marketplaces Transactional revenue We think the PayPal business remains healthy, and project 22% revenue growth in F’09, down from 30% in F’08 We anticipate a significant slowdown in the growth of eBay’s Advertising and Non-Transactional revenue, to 12% in F’09, from 28% in F’08
Trang 3We are maintaining our F’09 revenue estimate of $9.57B, our F’09 EBITDA estimate of $3.20B and our F’09 EPS estimate of $1.75 We are projecting a ~240 bps compression in eBay’s gross margin due to the continued shift in business mix toward lower-margin revenue (such as PayPal) We think the company can drive operational efficiencies across its businesses and thus think the operating margin will contract by only ~160 bps Y/Y
Our Estimates and Outlook for 2010
In F’10, we think the company is likely to see growth rates rebound somewhat as the economy begins to recover and as the FX headwind is anniversaried in We are projecting 10% GMV growth and a 9% rise in Marketplaces Transaction revenue, as well as continued growth at PayPal, with Transaction revenue up 17% Further, we expect a rebound to 15% Y/Y growth across eBay’s streams of Advertising and Non-Transactional revenue
Our newly introduced forecast calls for F’10 revenue of $10.77B, EBITDA of
$3.47B and pro forma EPS of $1.99 We believe business mix will continue to hamper gross margins, down ~80 bps Y/Y in F’10 to 71.8% At the same time, we expect eBay will continue to successfully manage costs in order to minimize the operating margin impact; for F’10 we are forecasting a ~20 bps Y/Y decline on the operating margin side to 29.4%
We Are Introducing a Price Target of $17
In introducing price targets for our coverage, we have derived multiples based on 5-year forward EBIT CAGRs We believe the historical record does not provide a meaningful guide to valuation as (a) the majority of the companies in our coverage did not have a track record as public companies through the previous recession and (b) even the public companies were still in their early-growth (and, for some, rapid growth) stage during the last economic downturn
As such, given our projection for eBay of a ~9% F’09 - F’14 EBIT CAGR, and our view of the beginning of a possible economic turnaround in 2H’09, we believe the stock can achieve a 9x EV/EBIT multiple to our F’09 EBIT estimate (reflecting better forward visibility than the current valuation of 7x our F’09 estimate) and thus arrive at our December 2009 price target of $17
The parameters of our EV/EBIT multiple analysis are in the table below:
Table 105: Key Valuation Assumptions
5 yr forward EBIT CAGR 9%
2009 EBIT $ 2,172 Implied Enterprise Value $ 19,109
- Debt $ 52 Market Value $ 22,835
2009 Price Target $ 17 Source: Company reports and J.P Morgan estimates
Our EV/EBIT valuation is based on the following projections for revenue and operating income growth
Trang 4Table 106: Growth Profile
$ in millions
2009E 2010E 2011E 2012E 2013E 2014E
Less: Operating Expenses 7,400.0 8,360.4 9,338.6 10,242.6 11,131.5 11,991.4
Operating Income (Loss) 2,171.5 2,409.7 2,664.7 2,888.9 3,103.2 3,303.7
Source: Company reports and J.P Morgan estimates
Valuation and Rating Analysis
On a GAAP P/E basis, eBay trades 10.1x our F’09 estimate of $1.39 (which implies 3% Y/Y EPS growth) Due to the challenges we have enumerated above, we believe the stock is unlikely to significantly outperform its peer group in the coming months, and thus we rate it Neutral
Risks to Our Rating
Downside risks associated with our Neutral rating include: barriers to international expansion, risks related to the repositioning of eBay’s pricing structure, competition from sponsored search vendors, the company’s dependence on eBay Motors, competition from hardline retailers, risks associated with patent litigation, and valuation risks
International expansion is a concrete part of eBay’s growth strategy As the company continues to grow outside the U.S., it may face regulatory challenges and/or markets that make its business less profitable than it is in the U.S or other countries where it
is already established Thus far, we believe eBay’s international expansion has been carried out in a strategic and timely manner
eBay also faces risks from hardline retailers Although the bulk of eBay’s revenues come from the beginning and end of the retail life cycle, with each passing quarter, the percentage of revenue it earns from the in-season retail and fixed price sales continues to increase This puts the company in competition with traditional retailers and other e-tailers, including Amazon.com, Wal-Mart, BestBuy, and Home Depot
Failure to meet these challenges could lead to relative stock price underperformance There may be upside risks to our rating should the company be able to improve its search technology more rapidly than we expect, resulting in an acceleration of trade
on the platform Additionally, if the company takes steps that help the market value the separate parts of the enterprise more fully, the stock could outperform
Trang 5Table 107: eBay Annual Income Statement
$ in millions
eBay online revenue 4,680.8 $4,773.6 $4,901.2 $5,323.5
Total transactions 6,519.4 $7,157.2 $7,807.9 $8,729.8
3rd party adv rev 321.7 $0.0 $0.0 $0.0
Total Online Revenue 7,672.3 $8,690.4 $9,571.5 $10,770.1
Gross Profit (pro forma) 5,946.4 $6,523.6 $6,953.1 $7,736.3
Amort., Payroll Taxes, merger other 1,595.0 332.5 250.0 270.0
Pro forma op ex adjustments:
Pro forma operating expenses 3,415.6 3,816.2 4,121.6 4,571.6
Operating Profit (reported) 613.2 2,058.6 2,171.5 2,409.7
FASB Adjustment net of Taxes
Reported Net Income Adj for FASB123 348.3 1,757.5 1,758.8 1,964.6
Trang 6Table 107: eBay Annual Income Statement(cont.) )
Pro Forma Diluted Outstanding Shares 1,376.3 1,315.1 1,283.9 1,268.6
2
As a % of Revenue
Year-Over-Year Growth
Third Party Advertising revenue 87.2%
Source: Company reports and J.P Morgan estimates
Trang 7Table 108: eBay Quarterly Income Statement
$ in millions
Q1-07 Q2-07 Q3-07 Q4-07 Q1-08 Q2-08 Q3-08 Q4-08E Q1-09E Q2-09E Q3-09E Q4-09E
% Change Y-Y 14.2% 12.2% 13.9% 12.3% 12.3% 8.4% -0.8% -8.5% -7.4% -6.1% 6.4% 9.3%
eBay online revenue 1,111.4 1,133.3 1,155.9 1,280.3 1,267.6 1,233.3 1,163.9 1,108.7 1,196.8 1,182.3 1,217.2 1,304.9 Total transactions 1,530.4 1,565.6 1,603.8 1,819.6 1,827.4 1,813.6 1,740.2 1,776.1 1,890.4 1,868.8 1,938.7 2,110.0 3rd party adv rev (old metric) 60.5 76.2 77.0 108.1
Marketing Services Rev 163.7 182.5 191.6 250.6 245.1 251.9 240.1 273.9 276.3 281.9 264.9 305.6
Total Online Revenue 1,768.1 1,834.4 1,889.2 2,180.6 2,192.2 2,195.7 2,117.5 2,185.0 2,311.7 2,305.6 2,368.6 2,585.7
COGS pro forma adjustment (8.8) (9.6) (9.1) (9.5) (16.6) (17.6) (10.4) (15.0)
Gross Profit 1,374.4 1,417.6 1,442.7 1,674.6 1,666.8 1,633.6 1,556.6 1,607.1 1,688.7 1,679.8 1,713.2 1,871.3 Gross Profit (pro forma) 1,383.2 1,427.3 1,451.8 1,684.1 1,683.4 1,651.2 1,567.0 1,622.1 1,688.7 1,679.8 1,713.2 1,871.3 Pro Forma Gross Margin 78.2% 77.8% 76.8% 77.2% 76.8% 75.2% 74.0% 74.2% 73.1% 72.9% 72.3% 72.4%
Amort., Payroll Taxes, merger other 47.35 51.55 1,442.8 53.3 54.83 54.9 52.7 170.0 70.0 60.0 60.0 60.0
Pro forma op ex adjustments:
Sales & marketing (19.2) (23.1) (22.2) (16.8) (23.8) (24.6) (23.75) - - -
Product development (16.0) (19.4) (21.4) (19.3) (23.5) (24.7) (23.46) - - -
G&A (28.0) (27.5) (27.9) (24.1) (29.6) (31.6) (32.65) - - -
Payroll exp on employee stock options (1.8) (1.3) (2.3) - (0.3) (1.7) (0.50) - - -
Amortization of acquired assets (51.9) (56.9) (1,448.3) (53.3) (54.8) (54.9) (59.40)
Total (116.9) (128.2) (1,522.0) (113.5) (132.0) (137.5) (139.8) (180.00) (150.00) (150.00) (180.00) (180.00) Pro forma operating expenses 789.7 832.5 858.4 935.0 982.0 950.7 892.7 990.7 1022.7 1002.9 995.6 1100.4 Operating Profit (reported) 467.8 456.9 -937.7 626.1 552.8 545.4 524.1 436.3 516.0 526.9 537.6 590.9 Operating Margin (reported) 26.5% 24.9% -49.6% 28.7% 25.2% 24.8% 24.7% 20.0% 22.3% 22.9% 22.7% 22.9% Operating Profit (pro forma) 593.5 594.7 593.4 749.1 701.4 700.5 674.2 631.3 666.0 676.9 717.6 770.9 Operating Margin (pro forma) 33.6% 32.4% 31.4% 34.4% 32.0% 31.9% 31.8% 28.9% 28.8% 29.4% 30.3% 29.8% Interest and other income, net 30.0 34.0 38.4 51.9 29.6 23.4 38.6 12.0 15.0 16.0 18.0 20.0 Interest Expense (4.5) (2.7) (2.7) (6.6) (2.9) (0.6) 0.0 - - -
Trang 8Table 108: eBay Quarterly Income Statement (cont.)
Pro forma adjustment 42.3 42.5 31.7 48.9 46.8 47.928 50.3
Net Income (reported) 377.2 375.8 (935.6) 530.9 459.7 460.3 492.2 345.2 416.9 426.2 436.2 479.6
Reported Net Income Adj for FASB123 377.2 375.8 (935.6) 530.9 459.7 460.3 492.2 345.2 416.9 426.2 436.2 479.6 Pro Forma NI Adj for FASB 123 460.5 471.1 563.8 605.0 561.5 567.5 592.1 495.4 527.8 537.0 570.1 612.9
GAAP Diluted Share count 1,384.3 1,379.7 1,354.8 1,352.1 1,333.8 1,312.0 1,288.9 1,288.6 1,274.7 1,270.8 1,267.0 1,263.1 Pro Forma Diluted Outstanding Shares 1,384.3 1,379.7 1,373.3 1,368.1 1,344.0 1,325.1 1,297.5 1,293.6 1,289.7 1,285.8 1,282.0 1,278.1
As a % of Revenue
Sales & marketing 25.1% 26.0% 25.7% 23.8% 24.0% 23.4% 21.6% 23.3% 24.1% 24.2% 23.6% 24.1%
Total operating expenses 51.3% 52.4% 126.0% 48.1% 50.8% 49.6% 48.8% 53.6% 50.7% 50.0% 49.6% 49.5% Operating income (reported) 26.5% 24.9% -49.6% 28.7% 25.2% 24.8% 24.7% 20.0% 22.3% 22.9% 22.7% 22.9%
Net income (reported) 21.3% 20.5% -49.5% 24.3% 21.0% 21.0% 23.2% 15.8% 18.0% 18.5% 18.4% 18.5%
Year-Over-Year Growth
eBay online revenue 12.2% 13.7% 13.6% 6.8% 14.1% 8.8% 0.7% -13.4% -5.6% -4.1% 4.6% 17.7%
Communications Revenue 110.4% 95.6% 87.6% 74.0% 61.9% 50.7% 46.2% 22.3% 21.0% 19.1% 20.3% 25.9% Total online revenue 27.2% 30.0% 30.4% 26.8% 24.0% 19.7% 12.1% 0.2% 5.4% 5.0% 11.9% 18.3%
Sales & marketing 10.7% 20.0% 22.9% 12.5% 18.9% 7.3% -5.8% -1.9% 5.7% 8.8% 22.3% 22.4%
Source: Company reports and J.P Morgan estimates
Trang 9Table 109: eBay Annual Balance Sheet
$ in millions
Assets
Cash and cash equivalents 4,221.2 2,692.0 5,163.7 7,986.4
ST investments in marketable securities* 676.3 301.1 301.1 301.1
Property and equipment, net 1,120.5 1,175.5 1,055.5 970.5
Liabilities and stockholders' equity
Source: Company reports and J.P Morgan estimates
Trang 10Table 110: eBay Annual Cash Flow Statement
$ in millions
FY FY FY FY
OPERATING CASH FLOWS
Stock based comp expense related to stock options and purchases 301.8 354.5 350.0 380.0
Excess tax benefit from stock-based compensation (84.8)
% Chg Q-Q
-
Purchase of intangibles and other non current assets 6.3 (51.4) - -
FINANCING CASH FLOWS
Excess tax benefit from stock-based compensation 4.7 - -
Payment of headquarters facility lease obligation - - - -
Source: Company reports and J.P Morgan estimates