- By Mark Yu
The $37.05 billion ecommerce website provided its first quarter 2017 results in April and is expected to report its succeeding quarter results in July 20 (Nasdaq).
The California-based eBay delivered 3.7% net revenue year over year growth to $2.2 billion and an impressive 114.7% profit growth to $1.04 billion (46.7% margin vs. 22.6% margin in the year ago period).
While the company's operating expenses rose by 10.5% year over year, it recorded $477 million in income tax benefits therefore more than doubling its profits in the recent reported period.
In July 20, eBay expects its second quarter net revenue between $2.28 billion and $2.32 billion, representing FX-Neutral growth of 5% - 7%, with non-GAAP earnings per diluted share from continuing operations in the range of $0.43 - $0.45 and GAAP earnings per diluted share from continuing operations in the range of $0.20 - $0.40 (68.9% reduction at midpoint comparison from fiscal year 2016 earnings-per-share figure (21% reduction at midpoint comparison from its year ago period).
In addition, eBay expects its full year 2017 net revenue between $9.3 billion and $9.5 billion, representing FX-Neutral growth of 6% - 8%, with non-GAAP earnings per diluted share from continuing operations in the range of $1.98 - $2.03 and GAAP earnings per diluted share from continuing operations in the range of $1.85 - $2.10 (68.9% reduction at midpoint comparison from fiscal year 2016 earnings-per-share figure).
In review, eBay recognized a tax benefit of $4.6 billion as a result of the initial stages of realigning its legal structure and the associated tax rulings. In addition, the company sold our equity holdings of MercadoLibre, Inc. for net proceeds of $1.3 billion resulting in marked rise in profits in fiscal year 2016.
"The first quarter was a strong start to the year with accelerating growth in active buyers, revenue and our core U.S. business.
"We are on the right path as we continue to evolve our shopping platform for consumers, leverage our technology advantages and market a sharpened eBay brand globally."
Devin Wenig, President and CEO of eBay Inc.
Valuations
eBay is undervalued compared to its peers. According to GuruFocus data, the company had trailing P/E ratio 4.98 times vs. industry median 20.3 times, P/B ratio 3.2 times vs. 1.7 times, and P/S ratio 4.3 times vs. 0.7 times.
The company has not provided any dividend payouts to its shareholders in the past decade.
Average 2017 revenue and earnings-per-share expectations indicated forward multiples 3.94 times and 17 times.
Total returns
eBay has outperformed the broader S&P 500 index so far this year with 15.3% total returns vs. 9.49% (Morningstar). Meanwhile, the company underperformed in the past five years with 12.23% (annualized) returns vs. the index's 14.77%.
eBay
According to filings, eBay Inc. was formed as a sole proprietorship in September 1995 and was incorporated in California in May 1996. In April 1998, eBay reincorporated in Delaware, and in September 1998, the company completed the initial public offering of its common stock.
eBay Inc. is a global commerce leader, which includes its Marketplace, StubHub and Classifieds platforms. Collectively, eBay connect millions of buyers and sellers around the world.
The technologies and services that power the company's platforms are designed to enable sellers worldwide to organize and offer their inventory for sale, and buyers to find and purchase it, virtually anytime and anywhere.
eBay's Marketplace platforms include its online marketplace located at www.ebay.com, its localized counterparts and the eBay mobile apps. The company believes that these are among the world's largest and most vibrant marketplaces for discovering great value and unique selection.
eBay's StubHub platforms include its online ticket platform located at www.stubhub.com, its localized counterparts, the StubHub mobile apps and Ticketbis. These platforms connect fans with their favorite sporting events, shows and artists and enable them to buy and sell tens of thousands of tickets whenever they want.
eBay's Classifieds platforms include a collection of brands such as mobile.de, Kijiji, Gumtree, Marktplaats, eBay Kleinanzeigen and others. Offering online classifieds in more than 1,500 cities around the world, these platforms help people find whatever they are looking for in their local communities
In 2016, 43% of eBay's revenue was generated in the U.S., 27% in other countries, 14.9% in Germany, and 14.6% in the United Kingdom.
The company has one operating and reportable segment, but its revenue could further be classified under transaction and marketing services.
In the recent quarter, transaction revenue grew 3.1% year over year to $1.73 billion (78% of total sales), while marketing revenue rose 6.1% to $488 million.
Gross Merchandise Volume (GMV)
eBay defined Gross Merchandise Volume ("GMV") as the total value of all successfully closed transactions between users on its Marketplace and StubHub platforms during the applicable period regardless of whether the buyer and seller actually consummated the transaction.
Further, eBay believes that GMV provides a useful measure of the overall volume of closed transactions that flow through its platforms in a given period, notwithstanding the inclusion in GMV of closed transactions that are not ultimately consummated.
In the recent quarter, total GMV rose 2% to $20.95 billion year over year.
Total transaction take rate
eBay defined total transaction take rate as total net transaction revenues divided by GMV.
In the quarter, total transaction take rate for the company rose five basis points year over year to 8.25%.
Sales and profits
In the past three years, eBay logged a revenue decline average of (-)17.6%, profit growth average of 36.5%, and profit margin average 33.8% (Morningstar).
Cash, debt and book value
As of March, eBay had $1.98 billion in cash and cash equivalents and $8.97 billion in debt with debt-equity ratio 0.77 times vs. 1.43 times in the same period last year. Overall debt has fallen $70 million while equity has grown $5.3 billion year over year.
19% of eBay's $24.8 billion assets were goodwill and intangible assets. The book value has grown by 83.6% year over year to $11.6 billion.
Cash flow
In the recent quarter, eBay's cash flow from operations fell by 9.2% year over year to $582 million. Despite the remarkable increase in profits, eBay recorded higher cash outflow in relation to its deferred income taxes and changes in working capital (assets and liabilities) and other, net of acquisition effects.
eBay also allocated $2.75 billion in investment purchases and receive proceeds amounting to $2.77 billion in such instruments in the quarter.
Capital expenditures were $135 million leaving eBay with $447 million in free cash flow vs. $483 million in the year ago period. In addition, the company spent 91.7% of this free cash flow in share repurchases having bought back about 10 million shares in the recent quarter at an average price of $33.65 a share--1.7% lower than today's share price of $34.23 (at the time of writing).
In 2016, eBay spent nearly $3 billion in share repurchases having an average buyback price of $26.28 a share. In the past three years, eBay averaged a buyback per free cash flow ratio of 101%.
Conclusion
The recent realization (Q4 2016) of several adjustments in eBay's income statements in relation to taxes and gains in its MercadoLibre investments gave superficially low earnings multiple, 4 to 5 times earnings vs. two-year average 14.9 times. Investors should probably be more patient in the coming quarters so as to see the genuine organic profit growth the eCommerce company would exhibit.
Nonetheless, eBay exhibited relatively good growth in its overall business involving its transaction and marketing revenues compared to its fiscal year 2014 operations when it suffered lower overall revenue growth.
eBay also seemed to exhibit good leveraged balance sheet accompanied by some blue sky elements--goodwill and intangible assets. The company also has been generous to its shareholders in recent years having bought back a good amount of its shares fairly less than where its share price is now.
31 analysts have an average price target of $36.31 vs. $34.23 (at the time of writing). Using the company's midpoint revenue projection for the current fiscal year and multiplied by three-year P/S average followed by a 20% margin indicated a value of $22.9 a share.
In summary, eBay is a hold.
Disclosure: I do not have shares in any of the companies mentioned.
This article first appeared on GuruFocus.
