Is eBay overpriced?
Valuecruncher has placed a value of $28 per eBay share with a range between $22.52 and $34.05. The current share price of $33.71 is at the upper end of the Valuecruncher range. Valuecruncher may be undervaluing eBay, as the methodology does not explicitly model the growth options available.
The current market price implies an enterprise value (EV) to EBIT multiple of 26.9 compared to Valuecruncher’s mid point EV-EBIT multiple of 22. It is difficult to compare eBay’s EV-EBIT multiple with other comparable companies as each has there own unique set of options. To provide a point of reference eBay’s current market multiple is considerably lower than online companies Amazon.com (42.4), InterActiveCorp (IAC) (38.4) and Google (38.2), none of these companies are directly comparable to eBay but they all have online growth opportunities. The size of these multiples suggests the market is prepared to include a significant portion of the potential growth opportunities value into today’s price. To add a New Zealand perspective online auction site Trade Me sold for approximately 15 times forecast EBIT in early 2006.
The short-term revenue growth rate of 25% and terminal growth rate of 5.8% used by Valuecruncher acknowledge the growth available to eBay. These growth rates are very aggressive but may not fully capture the potential of opportunities such as eBay’s VoIP provider Skype.
eBay’s ViOP provider Skype represents a significant growth opportunity but it is very difficult to model this opportunity explicitly. Skype had 171 millions users at 31 December 2006 using over 28 billion free Skype to Skype minutes. Skype out minutes totalled 4.2 billion in 2006 contributing to revenues of $195 million.
eBay hold a passive 25% stake in online classifieds site Craigslist which has an estimated revenue of $20 million per annum but has the traffic and untapped potential to significantly increase this. It is difficult to estimate a value of eBay’s 25% stake in Craigslist and it is definitely contributing to the difference between the Valuecruncher mid point valuation and the current market price.
Is eBay overpriced? The difference between the Valuecruncher mid point valuation and the current market valuation is approximately $7.5 billion. Whether eBay is overpriced (or under priced) depends on your opinion on the potential of VoIP, Skype and Craigslist.
Valuecruncher Assumptions
Valuecruncher has forecast revenues to grow at 25% over the next three years and an EBIT margin of 30%.
Terminal Growth Rate: 5.8%
Cost of Capital (WACC): 12.5%
Valuecruncher Valuation Report - eBay