Running The Numbers – Ebay ($EBAY) Looks Cheap Even With All The Negatives
There are plenty of commentators noting that $EBAY is facing numerous challenges in the current environment:
- Concerns about the impact of a slowing economy on the business.
- Problems with their community of sellers over fee structures.
- Competition from large players such as Amazon ($AMZN) and small niche operators.
- With 50%+ of revenues from outside the US there is an exposure to a rising US dollar as well.
$EBAY also hit a 52-week low of US$19.95 on the 29th September. On the positive side $EBAY has also grown revenues at a compound annual growth rate of over 30% since 2004 (2004 revenues of US$3.3 billion to US$7.7 billion in 2007) while generating profits (at the EBITDA level) in the mid-30% range. We decided to look at the underlying numbers for $EBAY using the Valuecruncher on-line valuation model to see what we think about the current share price.
Valuecruncher produces a valuation of US$23.88 for $EBAY. This is a current valuation not a target price. This valuation is 14.5% above the current share price of US$20.85.
Our assumptions are revenues of US$9.0 billion in 2008 growing to US$11.0 billion in 2010. We have used an EBITDA margin of 36.5% in 2008 decreasing to 35.0% in 2010. Our terminal growth rate is 3.75%. We used a terminal capital expenditure number of US$800 million. Our WACC (discount rate) is 11.0%. All of these assumptions can be amended in the Valuecruncher on-line valuation model to adjust the valuation.
Our analysis incorporates the cash on the $EBAY balance sheet – Valuecruncher calculates a net debt number.
Based on our analysis the current share price looks cheap. We also think our assumptions are pretty conservative. Looking at some sensitivities:
- 2010 revenues drop to US$10.5 billion – Valuecruncher valuation drops to US$22.77 (9% above current price).
- 2010 EDITDA drops to 32.5% – Valuecruncher valuation drops to US$22.13 (6% above current price).
- Terminal growth rate drops to 3% – Valuecruncher valuation drops to US$22.10 (6% above current price).
- All of these downside sensitivities occur – Valuecruncher share price drops to US$19.57 (6% below current price). That is a pretty negative outlook however.
Play with our assumptions – what does your analysis say?