EBay Inc - Zacks Investment Research



|eBay Inc. |(EBAY – NASDAQ) |$37.83* |

Note: This report contains substantially new material. Subsequent reports will have new or revised material highlighted.

Reason for Report: 1Q18 Earnings Update

Prev. Ed.: Feb 14, 2018: 4Q17 Earnings Update

Firms’ Recommendations: Positive: 55.2% (16 firms); Neutral: 41.4% (12 firms); Negative: 3.4% (1)

Prev. Ed: 14, 12, 2

Firms’ Target Price: $47.37 (↑$3.85 from the last edition; 27 firms) Firms’ Avg. Expected Return: 19.8%

Note: A flash update was done on Jan 25, 2018 (1Q18 Earnings Update)

Note: Though dated May 7, 2018, the data in the tables below are as of May 1, 2018.

Note: The tables below (Revenues, Margins and Earnings per Share) contain material from fewer brokers than in the Valuation table. The extra figures in the Valuation table are taken from reports that did not have an accompanying spreadsheet model.

Portfolio Manager’s Executive Summary

eBay Inc. (EBAY) and its subsidiaries provide online marketplaces for the sale of goods and services, online payment services and online communication offerings to individuals and businesses in the United States and internationally.

Of the 29 analysts covering the stock, 16 gave a positive rating, 12 neutral rating, while only one analyst provided a negative rating. Target prices range from $35.00-$58.00, with the average being $47.37. The most common methods used by analysts to arrive at their target prices were P/E and EV/EBITDA multiple, and sum-of-the-parts or DCF analysis.

Key factors for evaluating an investment strategy for EBAY are as follows:

▪ eBay faces direct competition from (AMZN), Google Inc. (GOOGL), Alibaba Group (BABA) and the B2B online marketplace. However, a significant portion of Marketplace transactions is now fixed price, thus, leaving no choice for eBay but to compete more fiercely with Amazon. Also, the possibilities of new entrants in the online space or offline retailers developing an online presence cannot be ignored.

▪ Weaker-than-expected global macro environment particularly in developing economies could limit eBay's ability to grow its businesses in the short term.

▪ Increasing competition could be a concern for eBay in the long run. Other areas of concern remain fluctuating exchange rates and Google’s updated search engine algorithm that can adversely affect eBay’s business.

▪ eBay spun off PayPal into a publicly traded company, which started trading on Nasdaq under the ticker PYPL on Jul 21, 2015, representing a reversal of analysts’ view that the two businesses are in an advantageous position together.

▪ eBay has made a number of important acquisitions recently, all of which are expected to boost growth.

The following is a summarized opinion of the diverse brokerage viewpoints:

Neutral or Equivalent (55.2%; 16/29 analysts):

These analysts believe that since eBay depends on its overseas business for more than 50% of its transaction sales volumes, it will be hurt by a weak global economy. With emerging economies like Brazil and Russia remaining weak, eBay is not in a position to take advantage of improved disposable income of consumers.

These analysts believe that eBay’s key strategic initiatives will take time to deliver results, given that the company’s Marketplaces' business merchandise volume has stayed considerably below the speed of growth of overall e-commerce, which is nearly 15%.

Also, mounting competition in the e-commerce space is a cause of concern. E-commerce, with a large user base worldwide, has turned out to be a sweet spot with more and more companies jumping on the bandwagon. eBay’s core marketplace faces strong competition from Amazon. eBay and Facebook also compete with Google, as its paid-search business offers an alternative model for eBay sellers. There are other sites, which pose a threat to eBay’s business as well. The analysts believe that lack of appropriate counter strategies could be a matter of worry in the long run.

But the analysts continue to believe that eBay offers a convincing opportunity with a desirable marketplace format, which has better margins, greater capital efficiency and no inventory risks than most retailers. Also, they are positive about numerous initiatives undertaken, including structured data, application of artificial intelligence, increased use of social media to drive traffic, category merchandising and an easier listing process.

Positive or Equivalent (41.4%; 12/29 analysts):

These analysts are encouraged by the fact that eBay is one of the largest online marketplaces of the world with millions of active users. They believe that eBay has significant opportunities to grow given its very high international exposure. They believe that the company’s early lead in mobile shopping will help it take advantage of rapid growth in mobile.

These analysts are optimistic about the current platform investments in structured data/search, which will translate into meaningful growth. Also, it will benefit from rapid growth in mobile given its early lead in mobile and local online shopping. Growth will be further driven by leveraging recent acquisitions that connect local store inventory with eBay’s robust online platform.

The analysts believe that PayPal’s spinoff will continue to benefit. This is because although its growth rate has come down, the company will be able to reinvest the money it was putting into PayPal to further its own growth plans. eBay now intends to focus on growing sellers and active buyers, mainly small- and medium-size merchants, which constitute the major portion of the global retail market.

Negative or Equivalent (3.4%; 1/29 analysts):

These analysts are concerned about the fact the eBay continued to face tough competition

This analyst believes that post the PayPal spinoff, standalone eBay continues to face challenges over the next few years. The analyst remains skeptical about eBay’s ability to restore volume growth following the Google search issue. The analyst believes that the weakness in the Marketplaces business due to a data security breach that happened in 2014 is also a concern.

Other areas of concern are increasing competition in e-commerce and hardline retail market from companies like Amazon and Wal-Mart; undesirable effects resulting from the separation of marketplace and payments business and deceleration of growth in the e-commerce market, both domestically and internationally.

The analyst is also concerned about eBay’s increased investment toward overall platform technology and slower growth rate compared to its peers. Furthermore, eBay’s growth continues to suffer due to a weak world economy. The company is heavily dependent on countries outside the U.S for its transaction and Internet sales. Although the U.S. is flourishing, emerging economies are slowing down. So, a weak global economy bothers these analysts.

Overview

eBay, Inc. (EBAY), headquartered in San Jose, CA, and its subsidiaries provide online marketplaces for the sale of goods and services, online payment services, and online communication offerings to individuals and businesses in the United States and internationally. It now operates in one segment: Marketplaces. The Marketplaces segment provides online commerce platforms, allowing buyers and sellers to interact and trade with one another. It enables online commerce through various platforms, including the traditional platform and other online platforms, such as Kijiji, , Marktplaats.nl, and mobile.de, as well as , and StubHub. This segment also provides various services, including feedback forum; verified rights owner program; customer support; and tools and services.

It spun off its Payments segment offered by PayPal into an independent entity on Jul 21, 2015.

Additional information is available at . The company’s fiscal year references coincide with the calendar year.

The analysts identified the following key factors for evaluating the investment merits of the company:

|Key Positive Arguments |Key Negative Arguments |

| | |

|eBay’s structured data initiatives will lead to a better user experience |eBay will face growth challenges as a standalone business following the |

|through targeted search queries, enhanced product discoveries and |spinoff of PayPal in the coming years. |

|subsequent conversions. |As eBay’s international business continues to expand, fluctuations in |

|eBay’s modus operandi involves collaboration, rather than competition with|exchange rate will have a bigger impact on the company’s results. |

|offline retailers by providing them with a complete online marketplace. |eBay’s growth continues to suffer due to a weak world economy. |

|This bodes well for the company in the long run. |The company is heavily dependent on countries outside the U.S. for its |

|As one of the dominant players in fast growing e-commerce market, eBay is |transaction and Internet sales. |

|expected to continue to benefit from rapid growth in online sales. |Fierce competition in the retail/ e-commerce, online payments and |

|eBay’s business model, which requires no inventory and is not capital |communications sectors are posing competitive threats, challenging eBay’s|

|intensive, generates substantial free cash flow. |dominance. |

|eBay is in an advantageous position to benefit from the rapid growth in | |

|mobile, thereby leveraging recent acquisitions that connect local store |Google’s paid search business offers eBay sellers an alternative model to|

|inventory with the company’s strong online platform. |sell their products. This is affecting eBay’s sales. |

|The company has spun off PayPal into a different entity. The separation is| |

|generating opportunities for the company to build a solid foundation of |Changes to Google's search engine continue to result in loss of organic |

|structured data and artificial intelligence (AI) and customer-to-customer |traffic. The company is negatively impacted where its marketplaces |

|(C2C) business. |listings appear on search engine results. |

| | |

| |Following the 2014 cyber security breach, eBay lost a significant |

| |customer base. |

| | |

May 7, 2018

Long-Term Growth

eBay is one of the largest online marketplaces of the world and also one of the most recognized online brands. It has more than 1 billion items listed for sale and 168 million active users. This huge network of buyers and sellers provides a competitive advantage to the company, creating sufficient entry barriers for other businesses. eBay receives substantial Internet traffic everyday through its web properties which it monetizes through advertising, revenue sharing as well as fees from the classifieds segment. Analysts expect that these will continue to play a pivotal role in generating revenues for eBay in the long run. Furthermore, the company is shifting from auctions to fixed-price transactions so that it can collaborate with traditional online retailers and position itself better in the market.

Several initiatives including structured data and artificial intelligence, multi-screen capabilities, improved seller tools and buyer experiences are the major positives. Structured data initiatives are likely to boost the conversion rates and improve search positioning, paving the way for growth. Analysts believe that with these operational changes, eBay will be able to attract higher traffic to its website and generate incremental revenue. Its Marketing Services will serve as a longer-term growth driver given eBay’s broad portfolio of web properties, which generate a significant amount of Internet traffic. Also, on the whole, e-commerce growth is stable. Analysts believe that the ongoing secular shift in spending from offline to online and the rapid penetration of Internet-enabled mobile devices, local shopping apps, and social networks is fueling growth in e-commerce, which is a positive for eBay. Also, the company’s investments in its tech platform and divesture of the Enterprise unit and PayPal will offer the company with greater operating efficiency and enable it to focus on its core operations.

As a strategy to defend its market share against growing competition, eBay keeps doors open for technology partnership with offline peers. Analysts are optimistic about this move and believe that this can become one of the important growth drivers for eBay in the near future. E-commerce growth, increased smartphone usage and “24/7” shopping opportunity are believed to be the major growth drivers for eBay in the long term.

May 7, 2018

Target Price/Valuation

Provided below is a summary of target price and valuation as compiled by Zacks Research Digest

| Rating Distribution |

|Positive |55.2%↑ |

|Neutral |41.4%↓ |

|Negative |3.4%↓ |

|Average Target Price |$35.00↑ |

|Digest High |$58.00 ↑ |

|Digest Low |$47.37↑ |

|No. of Analysts with Target Price/ Total |27/29 |

Risks to the target price include foreign currency exchange risk, increased online competition, margin pressure, escalating operating costs, barriers to international expansion, competition from sponsored search vendors, frauds, risks associated with patent litigations, consumer demand, effectiveness and viability of the Internet as a commerce medium, slowdown in consumer spending due to geopolitical issues, execution risk associated with growth initiatives, adverse effects resulting from the divesture of the marketplace and payments business and macroeconomic uncertainties.

Recent Events

On Apr 25, 2018, eBay Inc. reported first-quarter 2018 results.

▪ Gross revenues of $2.58 billion were up 12% on a y/y basis.

▪ Proforma net income was $548 million (or EPS of $0.53) compared with $538 million (or EPS of $0.49) in the year-ago quarter.

Revenues

According to the press release, revenues in the quarter were $$2.58 billion, up 12% on a year-over-year basis (up 7% on an Fx-neutral basis) and within the guided range of $2.57-$2.61 billion. Revenues were below the Zacks Consensus Estimate of $2.598 billion. The growth was driven by strength across all three platforms — Marketplace, Classifieds and StubHub in the United States and internationally.

Provided below is a summary of revenue as compiled by Zacks Research Digest:

|Revenue ($ in Million) |1Q17A |

|Copy Editor |Shremoyee Mandal |

|Content Ed. |Aniruddha Ganguly |

|QCA/Lead Analyst |Aniruddha Ganguly |

|No. of brokers reported/Total |27/29 |

|brokers | |

|Reason for Update |1Q18 Earnings Update |

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May 7, 2018

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