Final Assessment: Financial Research Paper: eBay Mary E. Bartels - Cook

June 8, 2011

EBAY eBay, Inc., Company Overview Founded on Labor Day weekend in 1995, eBay now operates the world's largest online trading community. The first sale by founder and computer programmer Pierre Omidyar was a broken laser pointer that was headed for the trash can; he sold it for $14.83. As of December 2010, 94.5 million users were active globally buying and selling practically anything on eBay. That user list grew from 90.1 million the previous year-end. eBay brings together a diverse


community of individual and small business buyers and sellers that trade goods worth more than $2,000 every second. In 2010, the total value of goods sold on eBay was $62 billion. (eBay, 2010) With a highly active corporate development function, eBay has acquired such innovative businesses as PayPal (online payments), Bill Me Later (deferred payments for customers such as Borders, Continental Airlines and, (comparison shopping), (home and apartment rentals), StubHub (online ticket sales), and Gmarket (Asia ecommerce), which have put the company in the global lead in the e-commerce and payments business. Recent activity also bodes well for the company to become a player in the area of services designed for hand-held mobile devices. (eBay, 2010) In March 2011, eBay revealed its intent to purchase e-commerce behemoth GSI Commerce valued at $2.4 billion, one of the largest acquisitions ever for eBay. This move will strengthen the operations of eBay Marketplaces as well as PayPal. When finalized in August 2011, this combination should serve to increase cross-selling opportunities, especially with larger merchants. (Hoovers, 2011) Through its subsidiaries and affiliates, eBay operates in about 40 markets worldwide through websites that are focused on Vietnam, Thailand, Taiwan, South Korea, Singapore, the

EBAY Philippines, New Zealand, Malaysia, India, Hong Kong, China, and Australia in greater Asia/Pacific. In Europe, the company covers the U.K., Turkey, Switzerland, Sweden, Spain, Portugal, Poland, the Netherlands, Italy, Ireland, Germany, France, Belgium, and Austria. eBay reaches Mexico, Canada, Brazil, and Argentina in the Americas. In China, eBay has formed an alliance (it owns 49%) with TOM Online, the internet portal and wireless services company. In all, eBay does over half its business outside the United States. (S&P, 2011) Corporate Strategy eBay has stated its goal is to create a truly global marketplace, providing a faster, easier, and safer trading experience for its users. In order to accomplish that goal, eBay must create a system that is efficient, abundant and redundant. The company still has nightmares about the


³brownout´ of 1999, when a service interruption persisted for 22 hours. Growth has increasingly come through acquisitions of savvy local partners with an increased focus on the international front. These acquisitions accelerate the ³network effect´ which means that an online service becomes more valuable to its users as the number of users increases. (S&P, 2011) Another strategic move over the past five years has been the drive to win business selling goods not using the eBay platform. PayPal, Bill Me Later, and StubHub are examples of this trend. The company has also extended its product reach to include out of season, and antique/vintage items. (S&P, 2011) The company continues to roll out its online classifieds services. The eBay Classified Group has expanded with seven brands leading the way: BilBasan,, eBay Classifieds, Gumtree, Kijiji (Swahili for Village), and, serving more than 1,000 cities worldwide. eBay also owns a 28% minority share in Craig¶s List. (S&P, 2011) Industry Outlook

EBAY The analysts at Standard & Poor¶s are generally positive on the outlook for the Internet Software and Services sector. The basic tenets of their position are that the global economy is stabilizing and will be conducive to greater corporate spending on advertising, a greater percentage of the total spend will be directed toward online advertising, and pricing for the


online offerings is showing signs of improving. Online advertising in the United States grew by 15% in 2010 and S&P estimates an increase of 10% in 2011. S&P estimates that the United States represents about one-third of the total global online advertising market. Online retail merchandise sales increased by 11% in 2010 and S&P¶s outlook is for growth of 11% in 2011. S&P references market research from Forrester Research which depicts an industry with improving utilization of multiple sales channels, more customized offerings using better technology, and increasingly sophisticated marketing techniques, all of which bodes well for considerable sector growth over the next few years. (S&P, 2011) Competition While each of the participants in this sector has differing market entries and strategies, the three companies investors will generally compare to eBay are Yahoo, Amazon and Google. From a numerical analysis, Google is the best of the show compared to eBay. Google¶s pretax margin is 36.8% compared to 22.9%, net profit margin 29.1% versus19.7%, return on capital 19.1% versus 11.1%, current ratio (liquidity) 4.2 versus 2.5, P/E ratio 20.5 versus 25.1, five year EPS growth rate 17.5 versus14.6, PEG (ratio of P/E to growth rate ± the closer to 1.0 the better)1.2 versus 1.7, and finally Beta (a measurement of risk calculated as the price movements deviation from a standard market index such as the S&P 500 ± the closer to 1.0 the better) 1.2 versus1.6. (Argus, 2011) Analysis of Competition

EBAY eBay Sales ($M) Pretax Margin (%) Net Profit Margin (%) Return on Capital (%) Current Ratio Cash Flow per Share ($) P/E Ratio Five year growth rate (%) PEG Ratio Beta 9,156 22.9 19.7 11.1 2.5 2.11 25.1 14.6 1.7 1.6 Yahoo 6,325 16.9 19.5 9.8 2.7 0.91 19.5 16.9 1.2 0.9 Amazon 34,204 3.8 2.8 16.3 1.3 6.61 84.8 30.7 2.8 1.2 Google 29,321 36.8 29.1 19.1 4.2 34.31 20.5 17.5 1.2 1.2


EBAY v. S&P 500

Reflecting the risky EBAY Beta of 1.6, its lows are lower and the highs are lower than the market proxy S&P 500 Index. (S&P, 2011)

EBAY EBAY Historical Financials ($ Millions) Current Assets Non-current Assets Current Liabilities Non-current Liab Current Ratio Common Equity Common Shares Revenue EBIT Margin Net Income Margin Return on Equity EPS P/E ($34) PEG 2006 4,971 8,523 2,518 71 1.97 10,904 1,298 5,970 1,547 26% 1,126 19% 10.3% 0.79 2007 7,123 8,243 3,100 562 2.30 11,705 1,298 7,672 751 10% 348 5% 3.0% 0.25 2008 6,286 9,306 3,705 803 1.70 11,084 1,298 8,541 2,183 26% 1,779 21% 16.1% 1.36 2009 8,460 9,948 3,642 979 2.32 13,788 1,298 8,727 2,879 33% 2,389 27% 17.3% 1.83 19 1.35 EBAY Projected Financials ($ Millions) Current Assets Non-current Assets Current Liabilities 2010 11,065 10,938 4,516 2011 13,499 11,594 5,193 2012 16,469 12,290 5,972 2013 20,092 13,027 6,068 2010 11,065 10,938 4,516 2,185 2.45 15,302 1,298 9,156 2,098 23% 1,801 20% 11.8% 1.36 25 1.81 14.6% 12.5% 11.3% 7.9% 8.9% 4yr CGR 22.2% 6.4% 15.7%


EBAY Non-current Liab Current Ratio Common Equity Common Shares Revenue EBIT Margin Net Income Margin Return on Equity EPS P/E ($34) PEG 2,185 2.45 15,302 1,298 9,156 2,098 23% 1,801 20% 11.8% 1.36 25 1.81 2,185 2.61 16,679 1,298 10,163 2,266 22% 2,017 20% 12.1% 1.55 22 1.59 2,185 2.76 18,180 1,298 11,281 2,447 22% 2,259 20% 12.4% 1.74 20 1.42 2,185 3.31 19,817 1,298 12,532 2,643 21% 2,530 20% 12.8% 1.85 17 1.27


Risk of Stock Ownership eBay operates in the fast-changing technology sector against formidable competition. The last few years have shown that the company¶s financial results have been relatively unpredictable, which has been reflected in the volatility of its share price and its high Beta (1.6). Although eBay has established itself as a strong player in the internet wars, has an attractive business model and a strong balance sheet, the complexity of its operations in the global ecommerce business is on the rise. eBay shares trade at relatively high multiples of revenues and earnings which puts the investor at risk for substantial price declines if the company falls short of its financial guidance on a quarter by quarter basis. In addition, because of the sheer scale of the company¶s infrastructure, it will continue to be a target of fraudulent customer activity as well as

EBAY hackers. In addition, the acquisition of Bill Me Later exposes the company to greater credit risk


than has historically been the case. Finally, the rapid speed of change in internet technology puts the company at competitive risk from new developments by aggressive players in the space. Investment Thesis On April 27, 2011, eBay announced its first quarter results that were better than Wall Street had been forecasting. The results reflected strong growth in the PayPal division and some signs of improvement in Marketplace. Total revenues were $2.55 billion, which was an increase of 16% over the same quarter last year. As a driver of the revenue jump, the growth of global active users rose to 95.9 million, an increase of 5% over last year. Despite the 40.5% Marketplace margin, the company continues to be in an investment mode at PayPal and other recent acquisitions. Notwithstanding the surprisingly good 1Q, EBAY shares are not attractive at current prices ($34) owing to the higher P/E, lower growth rate, and higher risk factors compared to Google, which would be the preferred investment in this sector. (Credit Suisse, 2011)

EBAY References Argus. (2011). Retrieved June 8, 2011, from Analysts Notes: eBay. (2011). Retrieved June 8, 2011, from eBay: Equity Research. (2011). Retrieved June 8, 2011, from Credit Suisee: Profiles. (2011). Retrieved June 8, 2011, from Hoovers: Research. (2011). Retrieved June 8, 2011, from Schwab: Stock Reports. (2011). Retrieved June 8, 2011, from S & P:


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