Justin Sullivan
In the summer of 2020, I concluded that eBay (NASDAQ:EBAY) was no longer as compelling despite a partial classified sale. The sales price looked a bit soft, as the remaining ownership structure made the situation look quite complex, as I concluded that too much optimism was priced into the shares at the time.
Former Take
In July 2020, eBay has reached a deal with Norwegian-based company Adevinta SAA to sell its Classifieds business in a $9.2 billion deal, a deal which looked fair with activist investor Elliott valuing these activities between $8 and $12 billion.
The deal structure was a bit complicated, as eBay would obtain $2.5 billion in cash and be granted 540 million shares in Adevinta, giving it a 44% stake, valued at $6.7 billion. As shares of Adevinta rallied 27% on the news, eBay earned $1.8 billion on the deal announcement, effectively increasing the valuation to $11 billion.
With eBay being a $35 stock ahead of the crisis, initially falling to $25, shares rallied towards the $60 mark in July as the market recognized the potential for the firm to benefit from the pandemic, as shares actually fell $2 to $56 on the back of the Classifieds sale. This valuation was based on a $9.7 billion revenue guidance and $3 in adjusted earnings per share guidance for the year, with the company having 757 million shares outstanding at the time. At $56, the company was awarded a $46 billion enterprise valuation, including a $9.2 billion valuation of Classifieds.
The rapid move higher in the shares made that I was a bit cautious, even as the company saw second quarter sales up by around that quarter, as the move has made that valuation multiples have risen from 15-16 times earnings to 20 times, and with the activist investors onboard, it felt that the easy moves have been made already. All of this made me a bit cautious after a big move higher in a short period of time.
What Happened?
The rally in pandemic beneficiary companies in a knee-jerk reaction continued in 2021 as shares rallied to the $80 mark in October of last year, as eBay has fallen rapidly ever since alongside the retreat in technology names, with shares now down to $48 per share, up from a low around the $40 mark in recent times.
Early in 2021, eBay posted a 19% increase in full year sales to $10.3 billion, with gross merchandise value up 17% to $100 billion. Operating earnings rose accordingly to roughly $2.5 billion as both GAAP and non-GAAP earnings came in around $3.50 per share. The company manage to reduce the share count to less than 700 million shares as net debt of around $3 billion, a manageable number.
The deal with Adevinta closed in June 2021 as the company furthermore reached a deal to sell an 80.01% interest in its Korean business in a $3.0 billion deal to Emart. In July, eBay reached a deal with Permira to sell 125 million shares of Adevinta for $2.25 billion, as the remaining stake was still valued at $7.5 billion based on the same price, based on 415 million shares still held by eBay at the time.
Early this year, eBay posted $10.4 billion in sales, flattish compared to the year before, but up meaningfully if we account for continued divestments, mostly related to the sale of the Classified business. Non-GAAP earnings rose slightly to $2.6 billion, or $4 per share, as the company kept aggressively buying back stock. The company guided for 2022 sales at $10.4 billion, with non-GAAP earnings set to rise modestly to $4.30 per share, with GAAP earnings now seen a dollar below that number.
The company operated with $6.2 billion in net cash and equivalents, that is if you include the equity investments, a huge number as the outstanding share base had shrunken to just 606 million shares, equivalent to $10 per share. These are huge sums in relation to the market price now, and even at the start of 2022.
In May, the company posted softer first quarter results, triggering the company into cutting its full year guidance, yet the company maintained the guidance alongside the release of the second quarter results in August.
Quarterly sales and merchandise volumes were down high single digits or even double digits, yet the company maintained the full year guidance which it cut in the first quarter, seeing revenues at $9.6-$9.9 billion and adjusted earnings close to $4 per share. This includes nearly a dollar in stock-based compensation expenses, and if we adjust for that earnings power comes in closer to $3 per share, as GAAP losses coming in much lower, driven by impairment charges on some investments.
What Now?
The net cash position has fallen to just over half a billion, a huge decline from a more than $6 billion net cash position at the end of 2021. This decline in the balance was the result of shares of Adevinta taken a huge move lower as well as continued share buybacks.
More money was aggressively earmarked to buybacks as well, with 556 million shares outstanding, rapidly reducing the float. This share count and a $48 per-share price, makes that the enterprise valuation stands at just $26 billion. Note that this net cash position might rise a bit as shares of Adevinta have rallied a bit as well in recent weeks, while eBay has an implicit stake in the Dutch fintech player Adyen as well.
With eBay now operating with a roughly flattish net cash position, while realistic earnings trend around $3 per share the situation looks mixed at best. After all, the company trades at 16 times realistic earnings, while the net cash balance is close to flat, and eBay is of course not being able to deliver on solid and sustainable growth.
Shares look cheap, but the issue is that the company simply has a very mixed track record of value creation, as the M&A track record of the business is very mixed. In the meantime, the company is rapidly buying back stock, reducing the valuation of the firm in absolute settings while the company remains the owners of the key core auction operation of course.
Right now is the time to get more upbeat on eBay and while shares are down some $10 since the summer of 2020, vastly underperforming markets, the reality is that I am not convinced about eBay here. I like the moves to streamline the operations, but the overall performance remains a bit mixed and too stagnant for a too long period of time, at least that is my view. Hence, I am a bit cautious still, yet I am willing to consider on a renewed test of the low-forties.
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