Ebay

EBAY (EBay) Kyle AmesDate: November 20,

2009Consensus Estimate

9/09A 12/09E

12/10E

Sector: Consumer Services EPS 1.08 1.52 1.60Industry: General Retailers P/E 21.07 14.99 14.24Current Price: 22.79 Long Term Growth

Rate: 14.68%

52 Wk Price Range:

9.91-25.80 Ratio Analysis

Co. Indus.

Sector

SP500

Ave. Daily Vol: 17.03 Mil P/E (TTM) 21.07

16.68 0.36 123.07

Beta: 1.89 P/S (TTM) 3.51 0.97 0.12 2.02Market Cap: 29.47 Bil P/B (MRQ) 2.31 5.87 0.39 2.50Shares Out: 1.29 Bil ROA

(TTM)8.87 1.65 (0.44) 3.65

Inst. Ownership %:

72.50% EBO Valuation $22.92

Div Yld: 0% Recommendation:

BUY

Debt/Equity: 0.02 Stop-loss Price: 18.20

Member S&P 500?

Yes Price 6-mo prob

12-mo prob

Target Price

30.00 92% 99%

(Information for this box was obtained at msnmoney.com) (Target Price information was found at www.zacks.com)

¹Ebay.com2 Reuters.com3 MSNMoney.com4 Finance.yahoo.com5 Cnbc.com6 Amazon.com

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Investment Thesis On November 27, 2009 EBay

Inc’s online PayPal division said that on Thanksgiving day its volume of payments increased by 25% since last year.²

On November 19, 2009 EBay Inc. completed their sale of their communication department of Skype, retaining a thirty percent stake in the company.

Total payment volume transacted on PayPal in 2008 was $60,146,000,000

At the end of the fiscal year ending on December 31, 2008 the total worth of goods sold on EBay was $60 billion dollars or $2,000 every second.

The probability of the target price increasing by 31% or reaching $30 in one year is 99%.

The number of institutional investors increased by 14 and

SummaryFundamental Valuation:

Neutral- The EBO theoretical value today is larger then the current price but only by $2.50. If the discount rate was smaller it would increase the EBO value to $76.34 making it very sensitive to the discount rate.

Relative Valuation:Neutral- There was two bearish and one neutral signs leading towards the stock being low risk and overvalued. However there were one bullish and one neutral indicator that lead to the price being fairly valued or undervalued.

Technical Analysis:Neutral- There was two neutral, two bearish, and two bullish graphs.

Earnings Analysis:Bullish- There was no negative earnings surprises and no revisions up or down. Revenue and earnings have increased.

Analyst Recommendations:Neutral- There were more recommendations for hold but the amount of buy recommendations were only three less or currently 14 compared to 11.

Institutional Ownership: Bullish- The number of institutional investors increased by 14 and the increase of shares held by institutions increased by 2.43%.

Company Summary:In 1995 AuctionWeb soon to be EBay, was started by Pierre Omidyar.1 In

May 1996 EBay Inc. was incorporated into business. EBay Inc. operates in three business segments which are marketplace, payments, and communication. Its marketplace segment consists of their original auction website of ebay.com and other sale of goods and services such as half.com, rent.com, StubHub.com, ProStores.com, and shopping.com. EBay.com allows people to sell and buy personal merchandise. Individuals and companies can post products on the website to be sold in an auction. EBay charges the user of their website only for costs of posting. As a customer goes through the posting process on EBay they can be charged additional fees that are calculated at the bottom of the screen. For example customers can be charged 15 cents for additional pictures but the first picture is free. Half.com is a website that sells media products such as CD’s, movies, and books at a fixed price. Rent.com is a website that allows customers to list there apartments and houses for rent. StubHub.com is the world’s largest ticket marketplace where people can purchase and sell tickets among users for sporting events, concerts, theater, and other live forms of entertainment. Prostores.com is a website that allows small and medium size businesses to sell their products online. Shopping.com is a website that allows customers to compare goods online. If a customer is looking for a new flat screen TV, Shopping.com will list the TVs that they have information on and different website prices. The websites that EBay Inc operates in the marketplace segment all earn revenue off posting fees, advertisement fees, and referral fees from other businesses.1

EBay’s business segment in payments includes PayPal and Bill Me Later. PayPal is an online stored value system that permits consumers to make online payments to merchants and other desired individuals. PayPal then relies on the amount of money contained in the customers checking or credit card account. PayPal is free to purchasers but they charge sellers between 1.9 and 2.9 percent based on the amount sold. The larger the transaction the lower the percentage charged.1 Bill Me Later is a system that allows customers to credit purchases online. Bill Me Later runs through CIT Bank which extends a loan to the customer when goods are purchased and pays the merchant. A customer can access his or her account by just entering in their birthday and the last four digits of the social security number. Bill Me Later earns revenue off interest and late fees from the customers’ credit and transaction fees with merchants.2

EBay’s business segment in communication is through their 30 percent interest in Skype. This 30 percent interest was recently changed when they sold the company to a group of investors including a private equity firm Silver Lake, Joltid Limited, investment firm Andreessen Horowitz and the Canada Pension Plan Investment Board.2 Skype allows customers to communicate with other people around the world. Their methods of communication include, voice and video calls, instant messages, text messaging, and low cost calls to land lines and mobile phones. Skype generates revenue through providing their communication service and subscriptions to their communication services.2


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Net revenue by business segment for fiscal year ending December 31, 2008:Segment Revenue

Marketplaces $5,586,751Payments $2,403,669Communications $550,841Total $8,541,261(Information for graph was obtained from ebay.com and the numbers are in thousands)

Competition and Strategy:

EBay has many competitors in regards to their multiple possibilities of products auctioned or sold on their site. According to EBay’s 10-K 2008 annual report, they are in competition with all online and offline commerce participants. EBay Inc.’s main competitors are Google Inc, Amazon.com Inc., and Yahoo! Inc. The sector that these companies are in is consumer services and they are in the industry of catalog and mail order houses. Google has the largest market capitalization in the industry of $184.97 billion. Amazon has the second largest of $58.85 billion followed by EBay of $31.64 billion and Yahoo of $20.97 billion.

EBay competes with Google based on a customers’ ability to find a product that could have been found on EBay through the use of their search engine. EBay differentiates from Google in that they generate revenue from charging customers to use their services while Google offers free service to consumers and charges businesses for advertisements, referral fees, and where companies’ websites appear on search results. Google also has an application called Google checkout with allows customers to combine purchases made on the web and track it from Google’s website.7 EBay competes with Amazon in that they are both involved in online ecommerce of tangible products. Amazon is the largest online retailer.6 Amazon’s product offering include, books, movies, CD’s, office products, bed and bath, home and garden, shoes, and Jewelry.6 EBay and Amazon compete with each other pertaining to these product offerings but EBay offers a larger product market, different online payment methods, and communications. Amazon uses customer rates to involve customer feedback and offers free shipping to customers after ordering a certain monetary amount. EBay competes with Yahoo through their search engine connecting people to products obtain on other merchants websites then EBay’s. EBay differentiates from Yahoo through Yahoo focusing their revenue on advertisements, paid content or services, and referral fees. Yahoo has the capabilities to allow customers to search for products and shop using their yahoo shopping application. Customers can not buy products from Yahoo but they are referred to another site where they can after comparing prices on Yahoo.4

EBay’s competitive advantage is being the world’s largest online auction site. There has been other websites that have tried to form an auction site like EBay but their ability to grow to the size they are was their competitive advantage. EBay has 88 million active users worldwide where users can buy and sell almost


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any product.1 EBay has the advantage to allow users to use their website at a low cost to the user and take no part in the shipping or guaranteed sale of products online. EBay is using their creditable auction website of ebay.com to branch out into other possible auction type websites like StubHub.com. They are also allowing people to us their website to sell and advertise personal merchandise such as rent.com and ProStores.com.

Historical Revenue and Earnings:

Historical Revenue Historical EarningsFY 12/09 FY 12/08 FY 12/07 FY 12/09 FY 12/08 FY 12/07

1st Quarter

2,020.6 2,192.2 1,768.1 .28 .34 .28

2nd Quarter

2,098.0 2,195.7 1,834.4 .25 .35 .28

3rd Quarter

2,237.9 2,117.5 1,889.2 .27 .38 (.69)

4th Quarter

NA 2,035.8 2,180.6 NA .29 .39

Total 6,356.4 8,541.3 7,672.3 .80 1.36 .26(Numbers for chart were obtained from MSNMoney.com)

EBay reported a net loss of $936 million in the third quarter for the year ending December 31, 2007. This loss is why EBay experienced a -.69 loss per diluted shares during their third quarter in 2007. This operating loss was related to previously announced goodwill impairment related to EBay’s acquisition of Skype comunication.1 The historical revenue reported amounts were all positive and were increasing besides the first and second quarters for the fiscal year ending December 31, 2009. Their reported revenue on September 30, 2009 was higher then the 3rd quarter for the fiscal year ending December 31, 2008 probably due to the market improving and coming out of a recession. I believe that their 4th quarter reported revenue will be higher then the fiscal year ending December 31, 2009.3


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I. Fundamental Valuation PARAMETERS FY1 FY2 LtgEPS Forecasts 1.52 1.60 14.68% Model 1: 12-year forecasting horizon (T=12).Book value/share (last fye) 8.65 and a 7-year growth period.Discount Rate 14.07%Dividend Payout Ratio 0.00%Next Fsc Year end 2009Current Fsc Mth (1 to 12) 11Target ROE (industry avg.) 26.26%

Year 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020Long-term EPS Growth Rate (Ltg) 0.1468 0.1468 0.1468 0.1468 0.1468Forecasted EPS 1.52 1.60 1.83 2.10 2.41 2.77 3.17Beg. of year BV/Shr 8.650 10.170 11.770 13.605 15.709 18.122 20.890Implied ROE 0.157 0.156 0.155 0.154 0.153 0.152

(Beg. ROE, from EPS forecasts) 0.176 0.157 0.156 0.155 0.154 0.153 0.152 0.174 0.196 0.218 0.240 0.263(ROE-r) 0.035 0.017 0.015 0.014 0.013 0.012 0.011 0.033 0.055 0.078 0.100 0.122(1-k)*(ROEt-1) 0.000 0.176 0.157 0.156 0.155 0.154 0.153 0.152 0.174 0.196 0.218 0.240

1.000 1.176 1.361 1.573 1.816 2.095 2.415 2.782 3.266 3.907 4.760 5.9040.035 0.020 0.021 0.022 0.023 0.025 0.027 0.093 0.181 0.303 0.475 0.720

0.141 0.141 0.141 0.141 0.141 0.141 0.141 0.141 0.141 0.141 0.141 0.141 0.1411.141 1.301 1.484 1.693 1.931 2.203 2.513 2.867 3.270 3.730 4.255 4.854

0.000PV(growth*AROE) 0.03 0.02 0.01 0.01 0.01 0.01 0.01 0.03 0.06 0.08 0.11 0.15

1.03 1.05 1.06 1.07 1.08 1.10 1.11 1.14 1.19 1.28 1.39 1.54

(Assume this yr's AROE forever) 0.22 0.11 0.10 0.09 0.09 0.08 0.08 0.23 0.39 0.58 0.79 1.05(P/B if we stop est. this period) 1.25 1.15 1.16 1.16 1.17 1.18 1.18 1.37 1.59 1.85 2.18 2.59

12.20 11.25 11.32 11.38 11.44 11.50 11.56 13.37 15.51 18.11 21.30 25.29

8.65 10.17 11.77 13.60 15.71 18.12 20.89 24.06 28.25 33.79 41.17 51.071.52 1.60 1.83 2.10 2.41 2.77 3.17 4.19 5.54 7.38 9.90 13.41

0.053 0.147 0.147 0.147 0.147 0.147 0.320 0.323 0.331 0.342 0.355

Inputs:

1. EPS Forecasts and long-term growth rate (LTG) are from www.reuters.com2. Book value per share derived from www.reuters.com. The total equity for

the fiscal year ending December 31, 2008 was 11,083.9 and the total common shares outstanding were 1,282.03. To get book value per share I divided the total equity by the total common shares outstanding. 11,083.9/1,282.03= 8.65.

3. Discount rate: The November 16, 2009 H.15 was used and the 20 year rate from November 10, 2009 was 4.36 and the beta is 1.89. So .0436+1.89(.095-.0436) =14.07.

4. Dividend payout ratio was found at www.reuters.com and was 0.00%. 5. Next fiscal year-end is December 31, 2009.6. Current fiscal month is November or 11.7. Target ROE= Found at www.reuters.com and was 26.26%.

Output and Sensitivity Analysis:1. Based on these parameters, a 12 year forecasting horizon and a seven year

growth period, the EBO valuation is 25.29. 2. Changing the discount rate to 8.05% (-6.02) changes the EBO value to

76.34. 3. Changing the growth rate to 20% (+5.32) changes the EBO to 28.71.4. Changing the industry ROE to 15% (-11.26) changes the EBO to 11.95. The EBO value is a neutral signal. The EBO theoretical value today is $25.29

which is higher then the current price of $22.79 but only by $2.50. The discount


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rate is too high and if it were reduced to 8.05%, the stock would have a $76.34 EBO value which would be bullish. Changing the growth rate only slightly affected the EBO value. When the growth rate was five percent which is a 9.68 percent reduction, the EBO was only $20.52. Changing the industry ROE to fifteen percent affected the EBO drastically and was sensitive to change.2


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II. Relative ValuationComparables

Mean FY2

Earnings Estimate Forward Mean LT PEG P/ B ROE Value

Ticker Name Mkt Cap Current Price (next fiscal year) P/ E Growth Rate (MRQ) 5 yr ave Ratio P/ S

1 AMZN Amazon.com Inc. 56.14 129.66 2.53 51.25 25.08% 2.04 15.66 90.58% 0.17 2.59

2 GOOG Google Inc. 180.83 569.96 26.33 21.65 23.38% 0.93 5.36 20.12% 0.27 7.97

3 YHOO Yahoo! Inc. 21.55 15.38 0.47 32.72 17.39% 1.88 1.77 10.84% 0.16 3.30

4 #DIV/ 0! #DIV/ 0! #DIV/ 0!

EBAY Ebay 29.47 22.79 1.60 14.24 14.68% 0.97 7.70 10.79% 0.71 3.51

Implied Price based on: P/ E PEG P/ B Value P/ S

1 AMZN Amazon.com Inc. $82.00 $48.00 $46.35 $5.52 $16.82

2 GOOG Google Inc. $34.63 $21.75 $15.86 $8.51 $51.75

3 YHOO Yahoo! Inc. $52.36 $44.20 $5.24 $5.21 $21.43

4 0 0 #DIV/ 0! #DIV/ 0! $0.00 #DIV/ 0! $0.00

High #DIV/ 0! #DIV/ 0! $46.35 #DIV/ 0! $51.75

Low #DIV/ 0! #DIV/ 0! $0.00 #DIV/ 0! $0.00

Median #DIV/ 0! #DIV/ 0! $10.55 #DIV/ 0! $19.12

Indicator InterpretationP/E Bullish- EBay has the lowest P/E compared to its competitors

and could mean low growth, high risk, and underpriced.PEG (P/E/G) Neutral- .97 means that it is fairly valued according to Motley

Fool. It could also suggest that it is overvalued or less risky.P/B Bearish- 7.70 P/B is the second highest P/B compared to

competitors. This could mean that EBay has a high ROE, low risk, or is overvalued.

Value (P/B/ROE)

Bearish- The value ratio of .71 is by far the highest compared to the competitors and could mean that the stock has low risk or is overvalued.

P/S Neutral- The P/S ratio is the second highest but not by much. A high P/S could mean higher profit margin, low risk, or overvalued but it is not much higher then two competitors and 4.46 lower then Google.

Summary Neutral- After comparing EBay to its competitors a neutral signal was determined. There where two bearish signals and one neutral signal that are leaning towards EBay being low risk and overvalued. There were two indicators that suggested that EBay might be fairly valued or slightly undervalued.

4 Where EBay’s competitors were found2 Where information on EBay’s competitors were found


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III. Technical Analysis

Chart 1: Bollinger Ban5

Slow Stochastics5

Chart 2:Exponential Moving Average (EMA)5


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MACD5

Chart 3:Linear Regression5

Momentum5


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Briefly discuss each indicator in the following table.

Indicator InterpretationBollinger Bands

Bearish- The stock price is heading towards the bottom Bollinger band and might indicate a decrease in stock price.

Stochastics Neutral- Both %K and %D are in the same location or equal.Moving Averages

Bearish- The stock price is below the moving average. The direction of the MA is unclear.

MACD Neutral- The MACD line is greater then zero but not increasing and the MACD line is below the signal.

Regression Bullish- The trend is increasing and the price is below the trend.Momentum Bullish- The momentum is above 100 and seems to be increasing.


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IV. Earnings AnalysisEarnings Surprises

Sept. 2009(Last qtr)

June 2009(2 qtrs prior)

March 2009 (3 qtrs prior)

Dec 2008 (4 qtrs prior)

Sept. 2008 (5 qtrs prior)

Estimate 0.37 0.36 0.34 0.39 0.41Actual 0.38 0.37 0.39 0.41 0.46Difference 0.01 0.01 0.05 0.02 0.05

Mean Earnings EstimatesDec 2009

This Quarter

March 2010Next

Quarter

Dec 2009This Fiscal

Year

Dec 2010Next Fiscal

Year

LT Growth Rate

Earnings 0.40 0.40 1.52 1.60 14.68# Estimates 27 13 29 29 16

Earnings Per Share Estimates Revisions SummaryLast Week Last 4 Weeks

Revised Up Revised Down

Revised Up Revised Down

Quarter ending 12/09 0 0 7 11Quarter ending 03/10 0 0 5 3Year ending 12/09 0 0 17 5Year ending 12/10 0 0 11 16(Numbers for chart were found at reuters.com)The earnings surprises during the last five quarters have all been under estimated which is a bullish sign. The positive earning surprises might mean that EBay’s stock price is expected to rise in the future.

If analyst expectations are met they are expecting to have earnings of $1.52 per share this fiscal year. Earnings are also expected to rise to $1.60 going into the next fiscal year.

During last week, EBay’s stock has had zero revisions up or down. This sends a neutral signal that analysts are unsure of where EBay’s earnings are going to go. Over the last four weeks there have been 40 revisions up and 35 revisions down. For the year ending December 31, 2009, there are more revisions up then down but for the year ending December 31, 2010 there are more revisions down.2


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V. Analysts’ RecommendationsCurrent 1 Month Ago 2 Months Ago 3 Months Ago

Buy 11 10 9 5Outperform 3 3 3 2Hold 14 16 17 20Underperform 0 0 0 1Sell 1 1 1 2No Opinion 0 0 0 0Mean Rating 2.21 2.30 2.37 2.77(Numbers for chart were found at reuters.com)

The mean rating for EBay’s stock has dropped by .56 from 2.77 to 2.21. The largest number of recommendations resides in the hold position. However there are also a lot of buy recommendations. Hold has more votes but buy currently is just three votes less. For this reason I see this signal as neutral because hold recommendation is the major recommendation but is a weak signal. The sell recommendation also dropped one from two to one.2


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VI. Institutional Ownership

.

# of Holders% Beg. Holders Shares % Shares

Shares Outstanding1,292,951,7

50 100.00%# of Holders/Tot Shares Held 998 102.57% 980,574,607 75.84% # New Positions 98 10.07% # Closed Positions 73 7.50% # Increased Positions 376 38.64% # Decreased Positions 362 37.20% Beg. Total Inst. Positions 973 100.00% 949,131,893 73.41% # Net Buyers/3 Mo. Net Chg 14 50.95% 31,442,714 2.43%

(Numbers for chart were found at reuters.com)

EBay has an increase of 14 institutional investors and the percentage of shares held by institutions increased by 2.43 percent which are both bullish indicators. There was a slight positive difference between the amounts of investors selling the stock compared to investors buying it. From the increase in the amount of shares owned by institutional investors, it gives bullish signs for owning EBay’s stock.2


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VII. Piotroski Analysis

A. P/B ratio and quintile (1=growth, high P/B; 5=value, low P/B): P/B=2.31 so it is in the 3rd quintile and is in between a growth stock and value stock.

B. Piotroski Score: 6 or medium score

Piotroski Item Variable needed to compute Value Points1. Positive net income TTM net income 1,401.4 1

2. Positive cash flow TTM cash flow 2,821.4 1

3. Earnings Quality 1

4. Decreasing Debt Debt/assets most recent ann figure

26.5% 1

Debt/assets previous ann figure

28.9%

5. Increasing working capital

Current ratio most recent ann figure

1.78 1

Current ratio previous ann figure

1.70

6. Improving Productivity

Asset turnover most recent ann figure

0.5 0

Asset turnover previous ann figure

0.6

7. Growing Profitability

ROA most recent ann figure 8.87% 0

ROA previous ann figure 11.50%

8. Issuing Stock Shares outstanding most recent ann

1295 1

Shares outstanding previous ann

1312

9. Competitive Position

Gross margin most recent ann

71.5% 0

Gross margin previous ann 73.9%

Total 6(Numbers for graph were found at Morningstar.com)


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The Piotroski score of six is a neutral signal. The three piotroski items that did not score a point were competitive position, growing profitability, and improving productivity. For the competitive position, the cost of goods sold percentage increased causing the gross margin to drop from 2008. For growing profitability the amount of total assets must have increased more then the net income since 2008. Then for the improving productivity, total assets must have also increased more then the revenues did since 2008.


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