A Risky Bid For eBay

eBay's decision to shift the business mix back to auctions is a risky one, in my view. As I stated in my last write-up, I believe that management should bifurcate the model, focusing auctions on the auction friendly categories and new and in-season fixed price on the rest, while working to improve the user experience.

For now, I remain on the sidelines on the shares for lack of clear near-term catalysts.

Here as thoughts from Citigroup Analyst Mark Mahaney, Deutsche Bank analyst Jeetil Patel and Sanford Bernstein analyst Jeffrey Lindsay about the analyst day:

From Mark Mahaney:
eBay Hosted A Highly Detailed & Ambitious Investor Day - eBay provided a deep-dive into its 3 op. segments - Marketplaces, Payments, and Skype. eBay believes it can generate: 1) $10B-$12B in rev. by 2011 through current Payments and Skype revs and modest growth in its Marketplace rev.; 2) $2B in op. cost savings by 2011; and 3) $6B-$7B in FCF over the next 3 years. These projections are above ours - we view them as attainable, but aggressive.

A More Muted/Realistic Outlook For eBay's Core Marketplace Business - eBay guided to $5B-$7B in 2011 rev. for its Marketplace segment. eBay also guided to Marketplace segment op. margins of 35%-45% in 2011 vs. its '08 segment margin of approx. 44%. eBay went out of its way to target down its Marketplace market opportunity to the "Secondary Market," which is materially more muted than the broader online retail market that eBay mgmt has previously guided for. We view this as eBay correctly recognizing the limits of its value proposition in the in-season retail segment.

A Bullish Outlook For eBay's PayPal/Payments Business - eBay guided to $4B-$5B in 2011 rev. for its Payments segment. eBay also guided to Payments segment op. margins of 18%-20% in 2011 vs. its '08 segment margin of approx. 20%. PayPal is becoming an increasingly important part of eBay's overall business. Our view is that execution here has been top-notch. What's unclear, however, is whether off-eBay robust growth (Merchant Services) can overcome the drag of a deteriorating on-eBay business.

And A Bullish Outlook For eBay's Skype Business - eBay guided to $1B+ in 2011 rev. for its Skype segment and also guided to Skype segment op. margins of 18%-20% in 2011 vs. its '08 segment margin of approx. 21%. We believe eBay laid out a convincing growth strategy (based on product innovation and marketing opportunities) for Skype.

We Maintain Our Hold On EBAY - We'd say that eBay's Investor Day helped put a floor under a stock has materially underperformed over the last year. But we continue to view weakness in eBay's core Marketplace biz - which management acknowledged would underperform eCommerce in '09 - as limiting material share price appreciation. Further, eBay's segment margin outlooks and the company's overall mix-shift towards lower margin segments almost certainly translates into a consistent, multi-year margin decay that makes sustainable double-digit EPS growth a stretch and single-digit EPS growth the most likely outcome.

From Jeetil Patel:
An optimistic 2011, but what about 2009? - Reiterate SELL

eBay hosted its analyst day yesterday, at which management provided details behind its financial goals for 2011. While filled with long-term optimism, we thought the analyst event lacked near-term reality with respect to the current deteriorating fundamentals. In light of no near-term (2009) guidance, anticipate acceleration in growth, competitive pressures and economic backdrop, we think it's difficult to put much credibility into the 3-year plan. We think investors should gauge eBay against near-term performance. We reiterate our SELL.

Aggressive 2011 Financial Targets

Even though current business trends remain challenged (sellers seeing further weakness in business in 1Q 2009), management positioned its views on the 2011 outlook, with $10bn-$12bn in revenues by 2011 and $6bn-$7bn in free cash flow generation over the next three years.
Considering the company averaged about $2.1bn the past three years, we think this assumes a decline in 2009 (to below $2bn in 2009), before aggressively ramping back up in 2010 and 2011.

Marketplaces Undergoing Transition, and Skype should be a keeper

Near–term, the marketplace business is expected to underperform industry growth trends before flattening out next year and reaccelerating in 2011 – representing an optimistic view from eBay,
we think . Clearly, this business represents the cash cow, and risk remains on declining demand, high seller commissions and lack of interface changes. We think the Skype unit is actually performing well, and management should hold on to this business model.

Price Target of $11

Our price target is based on 8x 2009E PF EPS of $1.40 reflecting a multiple below the S&P market multiple. We believe this multiple is warranted as the core business at eBay continues to show deteriorating market share trends, while its non-core assets/FX/acquisitions mask organic levels of growth which translates into a stock that deserves a below market multiple on our FY09
estimates. Risk on the upside include: listing promotions, positive impact from fee changes, operating margin expansion and marketplace transaction reacceleration.

From Jeffrey Lindsay:
EBay held its analyst day yesterday at its headquarters in San Jose. Management was candid about the issues facing the core Marketplaces business unit. We were encouraged by the acknowledgement that the auction model had been retained well past its best days and the cost of this had been a loss of share to competitors and lower customer satisfaction. Now the problem has finally been acknowledged, we think management will take appropriate steps to turn the core business around – with a particular emphasis on fixed-price sales. Management also painted an attractive picture of the future prospects for both PayPal and Skype, emphasizing the as-yet untapped potential for growth in their respective markets. Interestingly, PayPal was presented by management as eBay's "other core business" and PayPal management for the first time presented first – ahead of the management of Marketplaces and Sype.

Management forecasts for Marketplaces, eBay's core business, which accounted for 65% of 2008 revenue and 80% of operating profit, were in line with our already diminished expectations. Management confirmed that GMV and revenues are expected to decline in 2009 before leveling out in 2010 and resuming growth in 2011. While we doubt that the good news of the other businesses' upside will be enough to lift the stock significantly in the short term, we are encouraged by: (a) proposed improvements to the search platform, including cataloging; (b) the use of open standards development initiatives to boost innovation and development; and (c) the redesign of search into a platform rather than an application, providing greater flexibility for future development.