eBay's global expansion strategy and corporate acquisitions

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 slated 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. That user list compares to 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 Walmart.com), Shopping.com (comparison shopping), Rent.com (home and apartment rentals), StubHub (online ticket sales), and Gmarket (Asia e-commerce), 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 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)

Industry Outlook

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

Yahoo

Amazon

Google

Sales ($M)

9,156

6,325

34,204

29,321

Pretax Margin (%)

22.9

16.9

3.8

36.8

Net Profit Margin (%)

19.7

19.5

2.8

29.1

Return on Capital (%)

11.1

9.8

16.3

19.1

Current Ratio

2.5

2.7

1.3

4.2

Cash Flow per Share ($)

2.11

0.91

6.61

34.31

P/E Ratio

25.1

19.5

84.8

20.5

Five year growth rate (%)

14.6

16.9

30.7

17.5

PEG Ratio

1.7

1.2

2.8

1.2

Beta

1.6

0.9

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 Historical Financials

($ Millions)

2006

2007

2008

2009

2010

4 yr CGR

Current Assets

4,971

7,123

6,286

8,460

11,065

22.2%

Non-current Assets

8,523

8,243

9,306

9,948

10,938

6.4%

Current Liabilities

2,518

3,100

3,705

3,642

4,516

15.7%

Non-current Liab

71

2,185

Current Ratio

1.97

2.30

1.70

2.32

2.45

Common Equity

10,904

11,705

11,084

13,788

15,302

8.9%

Common Shares

1,298

1,298

1,298

1,298

1,298

Revenue

5,970

7,672

8,541

8,727

9,156

11.3%

EBIT

1,547

2,183

2,879

2,098

7.9%

Margin

26%

10%

26%

33%

23%

Net Income

1,126

1,779

2,389

1,801

12.5%

Margin

19%

5%

21%

27%

20%

Return on Equity

10.3%

3.0%

16.1%

17.3%

11.8%

EPS

0.79

0.25

1.36

1.83

1.36

14.6%

P/E ($34)

19

25

PEG

1.35

1.81

EBAY Projected Financials

($ Millions)

2010

2011

2012

2013

Current Assets

11,065

13,499

16,469

20,092

Non-current Assets

10,938

11,594

12,290

13,027

Current Liabilities

4,516

5,193

5,972

6,068

Non-current Liab

2,185

2,185

2,185

2,185

Current Ratio

2.45

2.61

2.76

3.31

Common Equity

15,302

16,679

18,180

19,817

Common Shares

1,298

1,298

1,298

1,298

Revenue

9,156

10,163

11,281

12,532

EBIT

2,098

2,266

2,447

2,643

Margin

23%

22%

22%

21%

Net Income

1,801

2,017

2,259

2,530

Margin

20%

20%

20%

20%

Return on Equity

11.8%

12.1%

12.4%

12.8%

EPS

1.36

1.55

1.74

1.85

P/E ($34)

25

22

20

17

PEG

1.81

1.59

1.42

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 e-commerce 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. Also, because of the sheer scale of the company's infrastructure, it will continue to be a target of fraudulent customer activity as well as 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)