Justin Sullivan
In August, I believed that eBay (NASDAQ:EBAY) has become a pure play with something to prove. This came after the company had been divesting non-core assets at an aggressive pace, with proceeds mostly used to buy back stock. While this strategic direction made some sense, it was time for the core operations to start performing as well, to thereby unlock potential value.
Some Background
In the summer of 2020, eBay reached a deal with Norwegian-based Adevinta ASA to sell its Classifieds business in a $9.2 billion deal, after activist investor Elliott put pressure on the business to create shareholder value, making eBay a large investor in Adevinta along the way. Optimism on the value of the business during the outset of the pandemic made that shares rose to the mid-fifties at the time. This worked down to a $46 billion valuation for a business which generated $9.7 billion in revenues and was set to earn around $3 per share.
With the pandemic fueling the business, shares rallied to the $80 mark in October, but were down to $48 in August of this year, as shares have only come down a bit further. The company posted a 19% increase in 2020 sales to $10.3 billion as operating earnings rose to $2.5 billion, with earnings seen around $3.50 per share.
After striking the deal with Adevinta, eBay sold an 80% stake in its Korean business in a $3 billion deal, while selling some shares in Adevinta along the way. 2021 sales came in at $10.4 billion which is flat on a reported basis, but up meaningfully if we account for divestments made along the way. Non-GAAP earning rose in a modest fashion to $2.6 billion, with earnings per share rising in a more rapid fashion to $4 per share following aggressive buybacks. 2022 sales were set to be flat again at $10.4 billion with non-GAAP earnings seen up to $4.30 per share, as GAAP earnings trend about a dollar lower than that.
Net cash and equivalents (including equity investments) were reported at $6.2 billion by the end of 2021 equal to about $10 per share with 606 million shares outstanding. Following a soft quarter, ahead of the real currency and economic headwinds, full year sales were now seen at just $9.6-$9.9 billion, with adjusted earnings seen around $4 per share, and GAAP earnings around $3 per share. Moreover, net cash has been all but depleted following continued buybacks and the share price decline of Adevinta’s shares.
With 556 million shares outstanding and trading at $48 in August, the enterprise valuation was down to $26 billion. With earnings seen around $3 per share, the unleveraged business traded at around 16 times earnings, which looks compelling, yet growth is no longer there. While being upbeat on the underperformance of the shares, I concluded that eBay has been weak at execution for a while, making me still cautious as I would be willing to consider shares if they hit the $40 mark again, levels at which we have arrived now.
An Update
After reviewing the investment thesis early in August, eBay has been hitting the newswires. Later that month, the company announced a $295 million acquisition of TCGplayer, a marketplace for collectible card games enthusiasts, and no other financial details were announced other than the purchase price.
A day later, eBay announced the purchase of myFitment Group. No financial details have been announced as the strategic rationale again looks a bit odd. myFitment is delivering tools and support to help automotive and power sport parts and accessories sellers thrive, a rather niche segment and non-core operation.
In November, eBay announced third quarter results with reported revenues down 5% to $2.4 billion, as sales would have been down 2% if not for the stronger dollar. The company squeezed out adjusted earnings of $1.00 per share with a small GAAP loss posted on the back of the decline in the valuation of Adevinta. With stock-based compensation running at around $0.20 per share a quarter, realistic earnings are still trending around $3.00 per share, as the net cash position came in around the flat line if we factor in the Adevinta valuation.
For the year, the company narrowed the full year sales guidance to $9.75 billion in sales and adjusted earnings around $4.10 per share, in line with the guidance following the warnings issued alongside the first quarter results.
Concluding Remark
With an uninspiring performance, sales down 2% year-over-year adjusted for currencies, and recent deals failing to have strategic rationale, I am a bit cautious.
At the same time, realistic earnings valuations have fallen to about 13-14 times here, while a flat cash position is still reported.
This is quite cheap, but then again, it feels as if eBay is simply missing the market momentum, leaving me quite cautious as many other businesses have seen far more fierce sell-offs in recent weeks and months.
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