A few analysts made the trek to San Jose yesterday to see what eBay (EBAY) had to say for itself. Not much, apparently.
Dreamy PayPal forecasts, crappy business trends, major strategic shift (Think of us as “PayPal” now), wimpy cost cuts, no announced plan to spin off or sell Skype. No wonder everyone came away unimpressed.
(On the positive side, the stock is screamingly cheap. And, in our opinion, there is no reason the right management team won’t be able to get all three businesses heading in the right direction. That said, we’re getting the distinct impression that this is not the right management team).
Doug Anmuth, Barclays:
Mgmt focused on re-making biz by shifting Marketplaces to secondary mkt & doubling PayPal total payment value by 2011, but we think 2011 outlook may be overly optimistic and structural challenges are likely to remain in core mktplace biz. Revising our PT to $14 on 10x ’09 PF EPS of $1.44.
- eBay recognises mktplace challenges & need for site innovation, but we still thought the day was light on details & this raises more questions about execution given the co.’s recent track record & the now lofty goals over the next few yrs. Having confidence in 2011 outlook is also difficult when co. seems to have limited visibility in 2009.
- Margin profile likely lower than expected given heavy re-investment & biz mix-shift. We are tweaking our # to acct for lower mgns. ’09 PF EPS to $1.44 from $1.48, ’10 at $1.51, & ’11 at $1.66.
- eBay shares at 8x ’09 PF EPS & have 12.6% FCF yield, but fundamentals to remain challenging given Marketplace declines, macro, & mgn pressures. Shift toward secondary mkt may be step in right direction but more dramatic changes & site innovation may still be needed, in our view.
Imran Khan, JP Morgan:
While we were encouraged by eBay’s focus on improving the customer experience and the technology platform, we continue to be cautious on the story, as many of the announced changes may not fully materialise until 2011. Additionally, we believe competition from Amazon and other online commerce sites could create further risks to the company’s financial targets. We reiterate our Neutral rating.
- Focus on PayPal. The co. is focusing on PayPal as its primary growth engine, as eBay believes online payments (unlike eCommerce) can be a market where one leading player will dominate. eBay is targeting F’11 revenue of $4B-$5B from PayPal; our current F’10 estimate is for $2.97B in PayPal revenue, an 11% F’08-F’10E CAGR. The integration of BillMeLater is expected to hurt margins in F’09 before a recovery toward long-term PayPal margins of 18%-20%.
- Marketplaces competitive environment remains tough. eBay sees Marketplaces revenue declining in F’09 before posting growth in line with eCommerce in F’10 and above-market growth in F’11. We continue to believe that eBay will underperform the eCommerce market growth rate due to (1) low pricing strategy by Amazon, Wal-Mart and other eCommerce sites; (2) continued expansion of selection by niche eCommerce sites; and (3) the continued entrance of brick-and-mortar retailers into the eCommerce space.
- Skype seen as a standalone asset. Management remains committed to growing the division as a standalone business. We think the current M&A environment would likely prevent a near-term sale of Skype in any event. eBay is targeting Skype revenue to exceed $1B in F’11; our current est. is for $0.77B in F’10.
- Conservative on costs, investment. Margins for the enterprise will continue to decline as the revenue mix shifts toward PayPal and Skype; management outlined areas of expected cost-cutting (approximately $2B in F’09-F’11), offset by continued plans for investments in the business. With the majority of cash offshore, and the uncertain macroeconomic environment, we believe sizable domestic acquisitions or share repurchases are unlikely in the near term.
Sandeep Aggarwal, Collins Stewart
Summary: [W]e came out modestly more negative vs. our already cautionary view on eBay. Though eBay sounded upbeat on PayPal’s growth opportunities and confident on its ability to eventually transform Marketplaces (nothing new!), it was clear to us that there is no near-term recovery in core Marketplaces business. In our view, Marketplaces continues to suffer from structural problems and competitive pressure from Amazon/others. We reit our Hold. We will remain on the sidelines in the absence of any near-term catalysts.
¡ Key takeaways from EBAY analyst day
1. No sign of near-term recovery in Marketplaces.
2. Near-term margin pressure in PayPal business due to BML integration.
3. Increasing emphasis on “secondary retail market” can backfire in our view and seems like bowing down to competitive pressure.
4. Upbeat management comments on PayPal potential – on-eBay, off-eBay, and in adjacent payment markets (i.e. mobile, government, etc.).
5. eBay provided 2011 target operating model with revenue and margin outlook and segment breakdown.
6. Skype an attractive asset for the portfolio but no synergies with eBay (nothing new here!).
7. Moderate near-term expectations for BML.
8. Management upbeat about advertising and classifieds opportunities.
9. Cautionary posturing for 2009 due to weak economy, FX headwinds, and lower interest income on cash balances.
10. The revitalization efforts require $2bn in investments until 2011 in customer retention and loyalty, user experience, search, improved trust.