Sunday, December 8, 2013

Invested in eBay Inc

Please read the disclaimer here: Enjoy the article, bitches!

I invested in eBay Inc quite some time back at USD 50.32 per share. The company has 3 business segments: payments (eBay owns PayPal), online marketplace and enterprise solutions. I invested in eBay as I think that the company has good profitability, attractive growth prospects and trading at a reasonable valuation. When I was younger, I always dreamed of being a PowerSeller on eBay. While that dream is shattered along with my dream of being a pokemon master, I can still make money off eBay by being a shareholder.

EBay achieved trailing twelve months (ttm) return on average equity and return on average assets of 12.63% and 7.15% respectively. While these returns on capital seem average, you need to take into account the fact that eBay has a large amount of goodwill and cash, cash equivalents and non-equity investments on its balance sheet. After setting aside $5.76 billion in cash, cash equivalents and non-equity investments to maintain the quick ratio at above 1.5, eBay would still have excess cash of $7.26 billion. The company’s ttm return on assets shoots up to a respectable 11.37% after deducting the $8.56 billion in goodwill and $7.26 billion in excess cash from total assets. I deducted goodwill from total assets as it just represents investments made in the past and is not employed in the day-to-day operations.  

EBay grew revenue and operating profits year-on-year (y/y) by 14% and 19.79% respectively in the third quarter of 2013. The company generated $3.89 billion and $799 million in net revenue and operating profits respectively. The following discusses the growth of eBay’s business segments:

Payments: Revenue and operating profits from this segment increased by 19% and 19.09% y/y to $1.62 billion and $368 million respectively in the third quarter of 2013. EBay’s payments business had 137.4 million global active accounts, an increase of 17% y/y. The payments business’ total payment volume reached $43.83 billion a 25% y/y increase.

Online marketplace: Revenue and operating profits grew by 12% and 11.91% y/y to $2.02 billion and $ 789 million respectively in the third quarter of 2013. Global active users grew by 14% y/y to reach 123.6 million in the third quarter of 2013. Non-vehicle gross merchandise volume reached $18.36 billion, a 13% y/y increase.

Enterprise: Revenue from this segment experienced y/y growth of 5% to reach $238 million in the third quarter of 2013. Operating profits dropped to $12 million a 14.28% y/y decline.

I estimate eBay’s owner earnings to be at $2.80 billion or $2.14 per diluted share. I bought the stock at $50.32, giving me a price-to-owner earnings ratio of 23.51 which is reasonable considering that the company is still growing at a healthy pace. EBay’s excess cash and investments make this stock even more reasonable. If you assume that all of eBay’s $7.26 billion in excess cash and investments are held offshore, the company still will have $4.72 billion (after deducting Uncle Sam’s 35% cut on foreign profits brought home) that it can pay out to shareholders.  The tax rate is actually lower due to foreign tax credits, but let’s be conservative (it’s more of me being lazy to perform more calculations).

Unlike the world of pokemon, you don’t have to catch ‘em all in investing. You just need to catch a few good stocks and hold them long-term, and I think eBay is a pretty good catch for me. Thank you for reading. Take care and stay rational

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