The eBay Marketplaces’ have over 25 million active sellers and 157 million active buyers around the world, creating a small but still present barrier to entry for rivals. The company is exploring a new “Amazon Prime” style service in Germany that could be rolled out globally. All of this and a multibillion-dollar profit from the PayPal (PYPL, Financial) spinoff has created a possible buying opportunity in Icahn’s third-largest holding.
The Icahn effect
In May 2014, Icahn began buying into eBay Inc. (EBAY, Financial) with a 27.8 million position worth over $1.5 billion. At the time, the stock was trading between $50 and $58 per share. Today, it’s less than half that, thanks to a split with PayPal, in which eBay bought $1.5 billion in 2002. PayPal has a market value of $39.50 billion, a great investment return by any standard and currently $10 billion more valuable than eBay.
Position history
- Aug. 2015 - 46,271,370
- May 2015 - 46,271,370
- Feb. 2015 - 46,271,370
- Nov. 2014 - 45,825,684
- Aug. 2014 - 30,803,015
- May 2014 - 27,803,015
As Icahn began buying eBay early last year, he was waging a campaign to split these two businesses. Here’s a letter from Icahn to eBay.
At the time, eBay’s management and board was against it, but the board came around later in September 2014 when it decided to separate the businesses because of the rapidly changing landscape in both commerce and payments –Â very Icahnesque.
eBay shareholders received one share of Paypal for every share of eBay they owned, but here’s the tale of the tape in the last few months.
EBAY Pre-Split: $66/share
EBAY Today: $24.01/share
PYPL Today: $30.93/share
Through the whole ordeal, Icahn has held steady, despite both stocks being down since the split. He bought in around the $60 price point. Right now, his money is down 10% in the stock (with PayPal spin included), which takes up about 9% of his holdings.
Collectively PayPal and eBay have ramped up sales by north of 300%, net income by 122% and book value by 183% since 2005. Separated, the question remains: what will the new eBay earn?
Stock buybacks should continue to benefit that number with eBay’s board recently approving a $1 billion share repurchase plan, on top of roughly $2 billion remaining under the company’s previous program; $3 billion in the $24-$25 range could boost the annual EPS by 10%, with its current multiple leaves little room for growth.
Historic multiples
eBay carries fairly high P/E and P/B ratios compared to the Standard & Poor's 500, yet both are well below industry averages. Given the potential for organic growth, something Icahn really likes to see (a la Netflix [NFLX] and Apple [AAPL]), eBay could see both 10%+ earnings growth and multiple expansion over the next few years.
Some quick and easy math using analyst estimates for EPS of $1.93 next year, growing 10% year over year (not in a straight line per se), we get $2.82 by 2020. Give it a 15x P/E and a $40 price isn’t too hard to fathom. Of course, the market trades on anticipation, so that price could be seen before 2020 with any positive announcements from the management team.
Icahn is a patient investor, who has already placed tremendous “activist” leverage on the company, but I can’t imagine him holding the stock if it doesn’t perform in 2016.
From a valuation standpoint, eBay is the better value for now, and it’ll be interesting to see if profit margins and cash flow improve in the coming years. Analysts talk about a “network effect” allowing it to drive better customer-to-customer offerings, but in a time when Whatsapp and Instagram grew user bases well above eBay’s in a matter of years, anything is possible.
Management has emphasized a stronger approach toward unique product curation, fixed price platform (over the auction business), improved selling tools, data-driven merchandising and multiscreen capabilities. In the future, eBay could venture into the entertainment business like Amazon (AMZN, Financial) and Netflix, but for now, it’s back to basics.
