eBay Not A Complete Disaster Anymore

eBay’s core marketplace business (EBAY) may actually finally be stabilizing (Q2)

Gross Merchandise Sales, the most important metric, grew sequentially in Q2 (for the first time since 2007), and the year-over-year decline slowed to 10% from 16% in Q1.  The marketplace is still a long way from growing, but before you can grow, you have to stop imploding.

Meanwhile… PayPal and Skype are cranking along.  This bodes well for the Skype IPO next year.  Skype is now a $700 million business growing 25% per year.

The analysts weigh in:

Imran Khan, JP Morgan

eBay, Inc: 2Q Performance Roughly in Line; Tweaking Estimates

eBay reported 2Q revenue, EBITDA, and pro forma EPS of $2.10B, $705M, and $0.37 vs. our respective estimates of $2.05B, $668M, and $0.37. Our estimates remain generally unchanged, with F’09 pro forma EPS of $1.53. Our key takeaways:

  • PayPal revenue growth remains strong. PayPal reported a strong quarter, with $669M in revenue, up 11% Y/Y and in line with our expectations. We think the largest near-term driver of on-eBay TPV growth is penetration and were encouraged to see it show a nearly 800 bp lift. Merchant services TPV grew 32% Y/Y (ex-FX) on a 44% increase in transaction volume. We believe that penetration increases will continue to more than offset ASP declines and are modelling F’09 transactional Payments revenue growth of 12%, up from our prior 11% estimate.
  • GMV declines appear to have stabilised. Non-Vehicles GMV declined 10% Y/Y (flat ex-FX) vs. a 16% Y/Y decline in 1Q and a 12% decline in 4Q’08. Fixed price continued to do better than auction and now comprises 51% of total GMV, up ~200 bps sequentially. Even when the impact of Gmarket and FX is excluded, non-Vehicles GMV was down only 1% Y/Y, on sold item growth of 3% and an ASP decline of 4%. We are encouraged to see GMV declines flatten out and even slightly improve and believe this is a sign of stabilisation. Therefore, we are now modelling F’09 GMV down 10%, vs. our prior -14% estimate.
  • Unfavorable mix shift more than offsets solid cost control efforts. eBay’s pro forma operating margins contracted 320 bps Y/Y, roughly matching our expectation for a 304-bp decline. As growth at the lower-margin PayPal and Skype businesses continued to outpace Marketplaces growth, this mix shift drove a ~285-bp gross margin decline and masked the conservative Sales & Marketing and G&A spend. We are slightly lowering our F’09 pro forma operating margin to 29.8% vs. our previous 30.0% estimate.
  • Valuation. eBay is currently trading at 8x our F’09E EBITDA vs. the peer group average of 13x. Given the macroeconomic headwinds and company-specific challenges in the core business, we think the stock will perform in line with our coverage universe, and we reiterate our Neutral rating. Additionally, we establish an F’10 year-end price target of $19 (previously, our F’09 price target was $15).  

Heath Terry, FBR:

 eBay reported revenue and EPS above consensus expectations and guided
  third quarter expectations above the Street. Gross merchandise volume
  grew sequentially for the first time since 4Q07, while strength at
  PayPal continued and Skype’s revenue growth accelerated. Active user
  growth matched 1Q’s 2% YOY growth rate, while take rates were stable
  at 7.9%, potential signs of stabilisation in the marketplaces segment.
  The company generated $602M in FCF, up from $578M last quarter. With
  net cash of $2/share and a 2009 FCF yield of 8.8%, we continue to
  believe there is real value in eBay. While management commentary and
  operating metrics point to stabilisation, we believe the longer-term
  value will come from management’s efforts to improve the buyer
  experience on the site. While there is considerable execution risk,
  with the stock trading at roughly 13x FY09 EPS, we believe the
  risk/reward is weighted in investors’ favour.

    * Strong 2Q results. 2Q revenue of $2.1B (-4.4% YOY) was above our
      estimate and consensus due to better-than-expected GMV and TPV.
      Non-GAAP EPS of $0.37 (-14% YOY) were better than consensus of
      $0.36 thanks to tighter cost controls. Pro forma operating margins
      of 28.1% decreased 350 bps YOY and 190 bps sequentially, lower
      than our expectation of 29.3% due to the decline in ad revenue and
      the impact of foreign exchange. The company generated $602M in FCF
      in 2Q, down 2% YOY. Management issued 3Q09 revenue guidance of
      $2.05B to $2.15B versus consensus of $2.0B, along with non-GAAP
      EPS guidance of $0.34 to $0.36 versus consensus of $0.35.

    * Operating metrics show signs of stabilisation. Active user growth
      matched 1Q’s 2% YOY growth rate, while take rates were stable at
      7.9%. eBay’s reported gross merchandise value of $13.4B increased
      4% QOQ, the first increase in GMV since 4Q07. PayPal grew 11.2%
      YOY, slightly higher than the 10.6% last quarter, while total
      payment volume growth increased from 10% to 12% YOY. PayPal’s take
      rate decreased to 3.77% from 3.81% largely due to higher
      cross-border trade. Skype grew 25.1% YOY, up from 21.3% in 1Q.

    * Increasing estimates and target price. Our estimates for 3Q09
      increase for revenue from $1.93B to $2.13B to reflect the
      stabilisation in the core marketplaces business and the
      stronger-than-expected growth in Skype and PayPal, while non-GAAP
      EPS remain at $0.35 on slightly higher expenses. For this year, we
      are raising our revenue estimate from $7.98B to $8.43B and our
      non-GAAP EPS estimate from $1.47 to $1.51. For 2010, our estimates
      go from $8.04B and $1.53 in revenues and EPS to $8.72B and $1.60.
      Based on our updated DCF model, our price target increases from
      $20 to $24, implying a 9.0x FY09 EV/EBITDA multiple.

      Risk/reward favourable. The core eBay marketplaces business
      continues to be the most important driver for EBAY’s share price.
      While the company is making progress, management still has a long
      way to go in addressing the years of technological neglect at the
      company. That said, we continue to believe that with $2.0B to
      $2.5B in FCF being generated annually, strong growth assets in
      PayPal and Skype, and the potential for a meaningful turnaround in
      the marketplaces business, EBAY continues to represent a
      compelling risk/reward proposition for investors.

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