eBay – What’s It’s Worth


Wide Moat Investing brings us a great post today. This is just a single post from the eBay series, so for more info, be sure to visit Wide Moat and/or subscribe.

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Ebay, we’ve found, operates an auction business that generates recurring sales on the widest variety of products. Its auction model renders substantial cost savings that retailers do not generally enjoy. Because it is the market-leading auction site, sellers can find the buyer willing to pay the most, and buyers find the largest selection of goods available for sale. At some level, this may all be marginally interesting, but the typical investor is most interested in what this business is worth.  Let’s get to it.

Valuations methods vary. Seth Klarman of The Baupost Group, in his Margin of Safety (Harper Collins, 1991), highlights the three methods of valuation he finds useful: a) going-concern value, which employs net present value (NPV) analysis of a business’ future cash flows, b) liquidation value, which prices the sum total of the business’ assets, as if its parts were sold and the business dissolved, and c) stock market value, which is the price at which a business and its subsidiaries would trade in the stock market (121-122). NPV analysis is best suited for evaluating profitable businesses with a consistently demonstrated earnings power; liquidation value works best for evaluating unprofitable businesses that retain assets of some value; stock market value makes sense when evaluating closed-end funds whose net asset value differs from their market value.

Given Ebay’s earnings power, NPV analysis is the best tool for determining the value of Ebay’s business. In future posts, we will offer a NPV analysis of Ebay’s cash flows.

For today, I thought it would be instructive and informative to quickly observe the portfolio of businesses that Ebay has acquired over the last decade and their acquisition prices. In itself, the price that Ebay paid for these businesses is not particularly useful for our valuation of Ebay as a whole. To tip my own hand a bit, I would argue that Ebay has overpaid for some acquisitions; thankfully though, it got a great deal on others.

Since 1999, Ebay has acquired the following businesses (and I will only list those acquisitions greater than 200 million)

  • Butterfield and Butterfield (1999) ~ 260 million
  • Half.com (2000) ~ 350 million
  • Paypal (2002) ~1.5 billion
  • Marktplaats (2004) ~ 290 million
  • Rent.com (2004) ~415 million
  • Shopping.com (2005) ~ 620 million
  • Skype (2005) ~2.6 billion
  • Stubhub (2007) ~ 310 million
  • BillMeLater (2008)~ 945 million
  • Other misc. small transactions (minimum cost of 600 million)

TOTAL COST ~ 7.89 billion

MARKET CAP of Ebay (as of 2/6/09) ~17.4 billion

In addition, another important acquisition for Ebay was a 25% stake in Craiglist in 2004 for about 13.5 million. The private market value of Craigslist could range anywhere from 2-5 billion, which would value Ebay’s stake in the range of .5 to 1.25 billion.

Most simply, we see that Ebay has a wealth of assets.  Insofar as we can break out and separately value each of these parts, we should be able to come up with a sharper and better valuation.

Coming up next—Valuation, continued.

Disclosure: I, or persons whose accounts I manage, own shares of Ebay at the time of this writing.

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  • Jae,
    Im going to throw this out there. Aren’t you missing ebays biggest assets, its buyers and sellers?
    In this case we could simple say their worth 10 billion or the difference between market cap and total cost as calculated above. How would you value them.

    Alex’s last blog post..Magic Formula Stocks On The Move 1-04-09

  • Thanks for featuring this post, Jae. Recently I’ve really been struck by all the negative commentary about Ebay and used this series of posts to get a better understanding of the business and its value. My conclusion is that Ebay is a great business now selling at an attractive price.

    For those interested, I have also posted two net present value analyses of Ebay’s cash flows (here and here), and a relative valuation comparing it to its primary competitor, Amazon.

    I welcome any comments, questions, and concerns.

    WideMoat’s last blog post..Buffett, Technology, and Moats

  • ebay obviously has a huge moat in terms of online auctions. It’s network effect cant be beat but I really cant put a confident figure on ebay because it has never been consistent enough. It has good numbers and all but the consistency in all areas is lacking.

  • Care to say a bit more, Jae? Ebay strikes me as fairly consistent in revenues and expenses. They did write down 1.4 billion in goodwill in 2007 from the Skype acquisition. This was a non-cash charge, so no impact of cash flows. Though it does show that they likely overpaid for Skype.

    Thoughts?

    Wide Moat’s last blog post..Buffett, Technology, and Moats

  • to me eBay is no longer a hot growth company. I would say it is more of a mature growth company.

    So if I look at the past 5 years to determine whether eBay can continue in the future, their FCF is quite erratic, although positive. Their capex is continually growing, and if we look at the company at different timeframes, we see that earnings have been quite wild as well.

    I think I would prefer a company that manages a consistent 15% EPS growth rather than 60% then 17% then -40% etc.

    So that’s what I was referring to but other aspects are very good.

  • What? From the look of this chart, ebay CF is consistent

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