eBay Stock: Buy Marketplace Business At A Discount And Receive Their Investments For Free

eBay (NASDAQ:EBAY) is a neglected ecommerce company because its growth rate is unimpressive, but the company has a lot of value. Its balance sheet holds a significant margin of safety in cash and investments, and its share count has been decreasing precipitously. It’s the typical case of value hiding in plain sight.

eBay pay one get another for free

eBay at its current form and price can be divided into two distinct sources of value, a pile of cash and investments, and an auction business. The investment and cash pile are constituted by:

Adevinta

eBay has around 405 million shares of Adevinta, a publicly listed company in Sweden. The price per share is around $7.30 which makes eBay’s shares of Adevinta worth around $3 Billion. eBay holds 33% ownership in Adevinta, and it has to maintain a 25% participation until October 2023.

eBay Korea

The company sold 80.1% of eBay Korea for $3 Billion, which implicitly makes its 19.9% stake to be worth $745 million.

KakaoBank Corp.

eBay holds around 12.7 million shares in KakaoBank Corp., a publicly listed company in Korea. The price per share is around $26.85 which values the eBay part at $340 million.

Adyen

Adyen is probably the most difficult part to value because the company ownership is mostly through warrants. eBay owns around 0.1 million shares, that are publicly traded in Amsterdam with a price of $1,449, so eBay shares position is worth $145 million. The value of the warrants was marked to book value at $329 million and is probably undervalued. The warrants have a 7yr term, were acquired in 2Q2018 and give eBay the possibility to buy up to 5% ownership of Adyen. The investment value in Adyen for eBay considered was $474 million.

Putting it all together

The investments are worth $4.4 billion, and the company has around $6.3 billion in cash and non-equity securities. This $10.7 billion equals ~$19.10 per share which represents around 45% of the market cap of the company at the current price of $43. This means that if we buy an eBay share almost half of our investment is there in some form of cash or cash equivalent, so we are effectively paying around $24 per share for the auction business.

The auction business

eBay’s auction business has been lagging other ecommerce businesses, and it has been suffering the effects of increased competition in the last few years. The company has benefited from the pandemic lockdowns as did almost every ecommerce business in the world, but the growth issue just got delayed.

eBay’s management understands the need to address the growth problem and has been pulling some levers that, although in the beginning, are showing some promise.

GMV, buyers and revenues

The marketplace GMV has been growing at a rate of 2% per year since 2016 but fell off a cliff in 2019, and then was able to recover in 2020 and 2021 due to Covid. GMV in 2021 was $87.365 million. Active buyers growth has also been unimpressive. In 2021, the company’s active buyers fell by 9% year-on-year but were mainly driven by low-value buyers while high-value buyers increased by 3%.

While the most important focus to increase revenues is increasing the GMV of its marketplace and, that is where management is focusing its efforts, but it’s not the only lever that they can pull. eBay’s five main categories, all with GMV above $10 billion, are: Motors, Parts & Accessories; Electronics; Collectibles; Home and Garden; Fashion. Inside these categories, eBay has launched an innovation strategy to drive GMV growth for focus categories such as Trading Cards, Handbags (luxury), Watches (high end), and Sneakers. The company launched their authentication services for trading cards, luxury watches and handbags which allows buyers to authenticate the item they are buying, which increases trust and higher customer satisfaction. In the trading card category, the company also launched the eBay vault, which allows sellers to store the cards in a secure location, but it also allows buyers to buy and own the card instantly if they decide to keep it in the vault. The eBay vault is effectively an asset custodian and a storage location. The innovation and focus category represent around 20% of the GMV and management wants to apply the same recipe to other important categories such as P&A. This seems to be working for eBay with focus categories growing faster than the rest of the marketplace, from the Q4 call:

We are seeing faster GMV growth in focus categories that now represent approximately 20% of global volume.

[…]

As proud as I am of our team for delivering these results, I am more excited about eBay’s future based on the response from our customers to the strategy we are implementing. This is evident in focused categories. We are delivering best-in-class customer satisfaction, and it is leading to faster GMV growth. In Q4, focus categories grew 15 points faster than the rest of the marketplace.

The next category we are focused on is motors, parts and accessories or P&A for short. This is one of our largest categories globally and is full of enthusiasts who are passionate about what they trade on eBay. Many are very active buyers who shop in multiple categories, with over 60% of the eBay spend coming on products outside P&A.

Besides focusing on categories where the average spend per buyer is higher, the company is also introducing a series of features to attract more buyers and sellers. The company launched a partnership with Klarna to allow customers to Buy Now Pay Later, and it started to introduce the eBay Wallet. Additionally, the company has been investing in the eBay store to improve customer experience. The other lever that the company can pull to increase revenues is the bet on the advertising which has been growing faster than the GMV and has doubled since 2016 and represents $1 billion in sales. The company payment system was fully migrated by the end of 2021, and managed payments by eBay represented 100% of the GMV.

Marketplace Valuation

The eBay marketplace value alone is lower than the current share price assuming conservative assumptions. In this case, I am just trying to figure out the value without counting on growth.

Earnings Power Value ($ millions)	Worst Case	Base Case	Best Case
Sustainable revenues	9,444	9,752	10,060
Implied EBIT	2,606	2,691	2,877
Implied EBIT MG	27.6%	27.6%	28.6%
Taxes @ 16,5%	430	444	475
Maintenance Capex	472	488	503
Depreciation	486	486	486
Earnings Power	2,190	2,246	2,385
EPV Multiple	16	16	16
EPV	35,044	35,933	38,166
Debt	8,333	8,333	8,333
Intrinsic Value	26,711	27,600	29,833
Shares outstanding (millions)	560	560	560
Intrinsic value per share	47.71	49.30	53.29
Upside	12%	16%	25%

Even in the worst-case scenario, which predicts revenues lower than the company guidance, the upside is 12%, and although that is not that much, there is also the $19 per share in investments. For the taxes and capex, the company guidance was used. The EBIT margin assumed was the average EBIT margin of the last three years, and cash and equivalents were not included because they were already included in the investment pile. Adding the two sources of value:

eBay Valuation ($)	Worst Case	Base Case	Best Case
Marketplace value per share	47.71	49.30	53.29
Investments and Cash	19.05	19.05	19.05
eBay intrinsic value per share	66.76	68.35	72.34
Upside	57%	60%	70%

In my opinion, there is value in eBay, but the form of its value is not straightforward and that is probably why the market does not recognize it. In order to fight the disparity between price and value, the company bought $17.1 billion of its own shares in the last three years and should continue to do so since the company has $4.7 billion approved on its buyback program and stated that will continue to sell its investments in the future.

Risks and margin of safety

The main risk of this thesis is the fact that the recent uptick in eBay GMV, buyers and growth in focus category is all due to the pandemic lockdowns, but while the answer to that is unknown at the moment, it’s a risk that at this price it makes sense. Other risks are an M&A buying spree gone wrong, which can happen, but it’s mitigated since management has shown commitment to return capital to investors. Nevertheless, eBay’s free cash flow is not sufficient to pay for the big buyback programs and the company guidance on debt ratios does not allow for further debt issue, so the buybacks for 2023 are dependent on the monetization of their investments.

The setup for investment in eBay is a good one, since the marketplace valuation is a conservative one that does not consider future growth, while management sees revenue growth between 5% to 6% in 2023 and higher in 2024, with ads business doubling by 2025. On the investments side almost all the value comes from publicly listed shares that have been decreasing along with the market, the current moment already represents a better point of entry in those investments. Moreover, the Adyen warrants may be worth a lot more than the book value. All these factors add a compelling margin of safety to the investment thesis and put the odds on our side.