I was just exploring Barron’s new blog, the Tech Trader Daily, for the first time today. I noticed a short article titled, “Ebay: Bear Stearns Says It Is Time To Buy“. Ebay Inc. is a great business with a tremendously wide moat with both its only marketplace and its PayPal payment processing service. I was rather excited that I might finally find a fat pitch.
However, I think Robert Peck of Bear Stearns is jumping the gun here. I ran a quick and dirty discounted cash flow model using the past five years of free cash flows and I project out the next five years of free cash flows using a linear regression. After discounting everything using a 10% discount rate, I came up with an intrinsic value of $28.75 per share for eBay (EBAY). I believe eBay would need to drop down to at least $21.50 before I would get excited about it. Ebay shares closed yesterday at $24.66 a share.
Peck mentioned a few positive trends for eBay, including partnering with Yahoo (YHOO) for advertising revenue. Too bad he didn’t mention that the Yahoo advertising system upgrade has been delayed. The also did not mention the waste of money on the acquisition of Skype. I also don’t think eBay Express is going to really help increase shopper demand. What Ebay really needs is a complete overhaul of their online customer interface. The website is getting way to complicated and cluttered.
Ebay is definitely worth watching, but I think a cheaper price is needed before I take any action.