Thomas Li’s write-up of eBay Inc (NASDAQ:EBAY) won him a Benjamin Graham Fellowship.
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Long eBay: Investment Thesis
eBay Inc (NASDAQ:EBAY) (market cap $61bn) is a company that is currently cheap due to one-time events that depressed the stock. The company generates a tremendous amount of cash (8% FCF yield), management is shareholder friendly, the 2 main businesses have large economic moats and many channels to grow. Multiple catalysts down the next 12-18 months can also quickly increase the returns to investors. eBay is currently trading at 18x EBIT. The combination of great qualities in the business makes the stock a rare find for its price. The underlying sustainable cash flow generator with multiple levers for growth justifies a higher multiple.
eBay Inc (NASDAQ:EBAY) is an easily misunderstood business. There is a large consumer facing side, or eBay.com, which internally is known as Marketplace. To the rest of us, we know it as the largest auction site in the world. There are 2 more main divisions in the company, PayPal (technically referred to as Payments) and Enterprise. In 2009, CEO John Donahoe has embarked on a turnaround to change eBay from a online marketplace to a dominant player in mobile transactions and eCommerce, and created eBay Inc. Most investors today do not see past the fact that the eBay is no longer eBay.com but really eBay Inc., a different company from what many of us are used to.
Marketplace has defined for most of us what an online auction site is. Most of us are familiar with the business model of online auctions and “Buy-it-now”. Marketplace currently has over 180mm active members. 52% of eBay Inc (NASDAQ:EBAY)’s revenue comes from Marketplace and it makes that revenue from the sellers on the site. When someone goes to eBay and lists an item, he has the choice to pay certain fees to increase his selling page. Some of these could include having more pictures, larger pictures, more descriptive information etc. Once the item is listed and sold, eBay takes a cut off the sale price. Different items will cost the seller a different amount, for most products that are not books or CDs etc., eBay will take a $0.30 fee. For books and CDs the fee is $0.05. On top of that flat fee, eBay will take 10% of the selling price with a ceiling of $250. Marketplace has steadily been doing 40% EBIT margins for the past 5 years. That is in stark contrast with the 0% EBIT Amazon currently has, mainly due to the fact that Marketplace is not a retailer and takes a fee from transactions.
PayPal is the payment service provided by eBay, and currently represents 41% of revenues to the firm. The company was known as Confinity and was founded by the (currently known as PayPal gang) Peter Thiel, Max Levchin, Luke Nosek and Ken Howery in 1999, before Elon Musk bought it to merge with X.com. In 2000, its name was changed to PayPal and the company went public right after the market crashed following the 9/11 tragedy. eBay promptly bought PayPal for $1.5bn. PayPal provides users with a secure way of paying each other, allowing for the first time, individuals to accept payments from credit cards. In order to have a PayPal account, one simply needed an email address and a credit card. For every transaction on PayPal, the company will take a 2.9% transaction fee and that makes up the bulk of PayPal’s revenues, even till today. Depending on how a customer funds his PayPal account, the cost for PayPal will differ, largely due to having to pay out interchange fees. PayPal has recently branched out to an offline presence, which allows user to use PayPal’s app to pay at traditional stores and reduce the exposure to Mastercard Inc (NYSE:MA) and Visa Inc (NYSE:V), therefore starting on a path to improving margins.
See full presentation on Ben Graham Fellowship Finalist: Long Case for eBay in PDF format here.