Stock of the week - eBay (29.02.2024)

• eBay released Q4 2023 results on Tuesday
• Stock jumped almost 8% during post-earnings session
• Sales and profits beat expectations
• Upbeat outlook for Q1 2024
• Company boosts buybacks by $2 billion
• A look at valuation
• Stock trades at 7-month highs

eBay (EBAY.US) jumped almost 8% yesterday, in response to Q4 2023 earnings report released on Tuesday after close of the market session. Sales and earnings reported by the company for October - December 2023 period were slightly higher than expected, with company providing a rather optimistic Q1 2024 forecast. Let's take a look at company's earnings report as well as at its valuation!

eBay surprises with Q4 earnings

eBay reported Q4 2023 earnings after close of the Wall Street session on Wall Street. Report turned out to be a positive surprise, with net revenue as well as gross merchandise volume growing more than expected. Gross profit also turned out to be higher than expected. Operating income missed expectations and declined year-over-year due to an increase in SG&A as well as R&D expenses. Nevertheless, net income was better-than-expected, as the company booked $240 non-operating gain during the quarter.

Mid-point of revenue guidance provided for Q1 2024 was slightly lower than analysts' expectations. However, it points to a positive year-over-year growth, what was not always the case for the company in recent quarters. A small positive growth in GMV is also expected. However, adjusted EPS is a highlight of the Q1 2024 guidance, suggesting that the company expects solid margin expansion during the quarter.

Q4 2023 earnings

• Net revenue: $2.56 billion vs $2.51 billion expected (+2.1% YoY)
• Gross Merchandise Volume (GMV): $18.59 billion vs $18.16 billion expected (+1.4% YoY)
  • United States: $8.89 billion vs $8.76 billion expected (+1.8% YoY)
  • International: $9.70 billion vs $9.38 billion expected (+0.6% YoY)
• Adjusted gross profit: $1.87 billion vs $1.81 billion expected (+1.4% YoY)
  • Adjusted gross margin: 73.03% vs 73.35% expected (73.55% a year ago)
• Adjusted operating income: $410.0 million vs $662.8 million expected (-45.3% YoY)
  • Adjusted operating margin: 26.7% vs 26.4% expected (29.9% a year ago)
• Active buyers: 132 million vs 130.9 million expected (134 million a year ago)
• Total take rate: 13.8% vs 13.65% expected (13.8% a year ago)
• Adjusted net income: $560 million vs $542.8 million expected (-3.6% YoY)
  • Adjusted net margin: 21.9% vs 22.0% expected (21.9% a year ago)
• Adjusted EPS: $1.07 vs $1.03 expected ($1.07 a year ago)
• Free cash flow: -$3 million vs +$100 million expected (+$1,545 million a year ago)

Q1 2024 forecast

• Net revenue: $2.50-2.54 billion vs $2.54 billion expected ($2.51 billion a year ago)
• Adjusted EPS: $1.19-1.23 ($1.06 a year ago)
• Gross Merchandise Volume: $18.2-18.5 billion ($18.41 billion)

Financial dashboard for eBay. Source: Bloomberg Finance LP, XTB Research

Turnaround strategy starts showing results

Earnings release from eBay has been praised by analysts as it showed that recent steep job cuts and cost reduction measures are bearing fruit. The company decided to put more focus on niche categories, like sneakers and watches for collectors, or refurbished appliances and car parts for cost-conscious customers. Such a strategy was aimed at stopping continues decline in market share to giants like Amazon or Walmart, and so far results are promising. eBay also began to offering more advertising on its platforms, with ad revenue reaching $393 million, above analysts' expectations of $375 million.

While eBay's results were promising and Q1 guidance was upbeat, these were not the only drivers behind yesterday's jump in share price. The company also announced that it will boost the existing buyback program by an additional $2 billion, bring total authorization to $3.4 billion.

A look at valuation

Let's take a quick look at eBay's valuation with 3 often used valuation methods - DCF, multiples and Gordon Growth Model. We want to stress that those valuations are for presentation purposes only and should not be viewed as recommendations or target prices.

Discounted Cash Flow (DCF) method

Let's start with probably the most popular fundamental model for valuing stocks - Discounted Cash Flow method (DCF). This model relies on a number of assumptions. We have decided to take a simplified approach and base those assumptions on averages for the past 5-years. Detailed forecasts for 10 years were made, with terminal value assumptions being set as follows - 2.5% terminal revenue growth and 6% terminal weighted cost of capital (WACC). Such a set of assumptions provides us with an intrinsic value of eBay's shares of $55.24 - or over 15% above yesterday's cash close. Terminal value forecast accounts for almost 58.7% of DCF valuation.

A point to note is that the intrinsic value obtained via the DCF method is highly sensitive to assumptions made. Two sensitivity matrices are provided below - one for different sets of Operating Margin and Revenue Growth assumptions and the other for different sets of Terminal WACC and Terminal Revenue Growth assumptions.

Source: Bloomberg Finance LP, XTB Research

Source: Bloomberg Finance LP, XTB Research

Multiples valuation

Next, let's take a look at how eBay's valuation compares with peers. We have constructed a peer group consisting of 8 US-listed online marketplace companies - Amazon, Etsy, JD.com, Coupang, Sea Limited, Vipshop Holdings, Alibaba Group, Beyond. We have taken a look at 6 different valuation multiples - P/E, P/BV, P/S, P/FCF, EV/Sales and EV/EBITDA.

Taking a look at the table below, we can see that there is some volatility in multiples for eBay peers, especially in the case of P/FCF multiple, with Beyond being a clear outlier. We are providing valuation calculated using both mean and median, but medians seem to be less distorted. Using median multiples provides us with valuations ranging from $12.78 in case of EV/Sales multiple to $83.75 in case of EV/EBITDA multiple. A trimmed mean (excluding the highest and lowest valuations) provides us with an intrinsic value of $52.31 per share, or around 9% above yesterday's cash closing price.

Source: Bloomberg Finance LP, XTB Research

Gordon Growth Model

eBay is a dividend paying stock and therefore can be valued using a Gordon Growth Model - valuation method based on dividends. Company's dividend growth in recent years has been very volatile. We have assumed an 7% dividend growth rate as well as 9% required rate of return. Running a model with such assumptions leads us to an intrinsic value of $53.50 per share, or almost 12% above yesterday's closing price.

As it is usually the case with valuation models, the Gordon Growth Model is also highly sensitive to assumptions made. Sensitivity matrix for dividend growth and required rate of return assumptions is provided below. Green tiles show combinations that result in above-market valuation, and red tiles show combinations that result in below-market valuations.

Source: Bloomberg Finance LP, XTB Research

A look at the chart

eBay (EBAY.US) launched post-earnings trading session with a big bullish price gap and continued to gain during the cash session. Stock finished yesterday's trading almost 8% higher, recording the highest close in over 7 months! 

Taking a look at chart at D1 interval, we can see that the price broke above the upper limit of a short-term $40.00-44.25 trading range yesterday and has almost managed to reach a textbook target of the breakout in the 48.50 area. A key resistance zone to watch can be found in the $50 area, and has served as the ceiling for the price for over a year. It also marked the upper limit of the mid-term $40-50 trading range, in which the price traded since May 2022, spare for a few false breakouts. Should we see a break above $50 zone, upward move may extend towards the $60 resistance zone, marked with local highs from Q1 2022 and with a textbook range of the breakout from $40-50 range.

Source: xStation5