eBay Inc – Not quite time to buy yet
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.
Good notes on eBay. I’m curious to know what growth rate you used for free cash and at what level did you calculate free cash to be? I’m also curious to know, why you chose 5 years as the period?
Hi Ben –
I didn’t use a growth rate per se to calculate free cash flow. I actually used a linear regression (i.e., straight line connecting the dots) to forecast the future free cash flows.
I choose five years for the growth period for the sole reason that my automated spreadsheet that I use for “quick and dirty” valuations only pulled in the 5 past years of data. Normally, I the spreadsheet gets 10 years of data and then I would use a 10 year growth period for wide moat stocks. I think a 5 year growth period is a bit short for eBay, but good enough for my quick and dirty intrinsic value estimation.
I’ll provide the details of my calculation in a future post and I’ll also include a copy of my spreadsheet that I use for quick and dirty intrinsic value estimation in another post. Stay tuned…
Well it’s 2007 now and I guess you should’ve put your money in at $24. Back to the discussion, eBay is rather overpriced at the current price of $33. Please let me know how much the fair market value at a 10% discount for eBay stock at the current time, thanks.
I just did a technical analysis on eBay and come up with a positive divergent on this stock based on historical chart. Now would be a good time to buy in my opinion.
How can one conduct a DCF valuation without assuming a growth rate? It’s no wonder your valuation is so low. At currently 32 Ebay is severely undervalued and should be intrinsicall at $46 minimum.