At this point, we’ll settle for anything…
Sandeep Aggarwal, Collins Stewart:
Summary: Though the transformation of eBay’s Marketplaces remains a long and arduous process (structural issues/competitive pressure) and sustainability of take-rate for PayPal is under question, we are upgrading shares of eBay from a Sell to a Hold as the shares came within 3.0% of our $10 PT. In addition to internal problems, bleak retail outlook remains a drag on the shares but we believe that at the current level the downside risk is limited (trading at 6.5x our ’09 EPS). We note that we had initiated on AMZN/EBAY on Jan 14th with a Buy on AMZN & Sell on EBAY.
¡ What will make us more bullish on eBay? eBay remains one of the largest E-Commerce destinations with immense long-term potential. We will be more constructive if we see signs of improvement in Marketplaces’ metrics, higher adoption of Bill Me Later without negative impact on PayPal take-rate, or if the shares dip below $10. Conversely, further deterioration of Marketplaces and worse than expected correction in PayPal take-rate will make us more bearish on eBay.
¡ Transformation of Marketplaces. In early ’08, eBay embarked on transforming its ageing Marketplaces business, which was designed to handle auction format for E-Commerce but has been handling nearly 50% fixed-price format for the last several years. We believe that Marketplaces has multiple structural problems and it also suffers from competition from Amazon and others. To make things worse, bad economy is causing gross margin pressure for eBay (promotions, coupons, discounts, etc. for merchants). In our view the revitalization of Marketplaces is a much longer process than many believe on Street.
¡ Sustainability of Payments business. For merchants, PayPal costs roughly 3.9% vs. BML at 2.4%. However, BML can generate nearly 1,000bps more for eBay because of interest income (credit facility to consumers) and finance charges. In our view, the ramp of BML is risky because it can cannibalise PayPal’s higher take rate if customer adoption of BML as a credit provider is limited and default risk goes up.
¡ Communications business on standalone basis. eBay has already taken 1x goodwill impairment charge for Skype acquisition and acknowledged that Skype is a standalone business with almost no synergies with eBay. Though this business is not a drag on the earnings, management focus and resources still get diluted.