24/7 Wall St. 2007 Break Up Values: Ebay $28 (Current Price $32)

By Ryan Barnes. Edited by Douglas A. McIntyre

Ebay, Inc. (EBAY)

Ebay’s main property is obviously their flagship marketplace site, which generates revenues from listing fees collected on the user base, which currently stands at over 200 million.  The other 2 company-designated segments are Payments (Paypal) and Communications (Skype VoIP).

Ebay really can’t be sliced up any way other than spinning off the Paypal unit to realize the profit they’ve made on the deal, and selling Skype outright.  The Skype deal is less than 2 years old, but for the sake of analysis we will include the value of the purchase at cost as the technology is too new to provide much of a dent in current revenues at Ebay. 

Net income growth is still in very impressive territory over at Ebay, and the same goes for Paypal, which is clocking 30% plus income growth currently.  A stand-alone stock for Paypal could trade for 20x operating income very easily, which would value the unit at just over $10 billion.  Valuing Ebay’s core business is difficult because nobody knows for sure when the top-line growth will slow down to “normal” rates.  Ebay still deserves a premium valuation, so we’re giving it a multiple of 25x operating income, which would put the PEG ratio at about 1.2, bringing the total breakup value to $28 per share.  A company like Ebay should trade for more than its breakup value, as the brand, intangibles, and high barriers to entry are what give the company much of its value.  Still, with the recent troubles in the stock it is clearly close to entering “value investor” territory.

Ryan Barnes

Ryan Barnes has over 10 years’ experience in portfolio management and investment research, covering equities, fixed income, and derivative products. Ryan spent the past 5 years working as an institutional trader & manager for high-net worth investors, working with Merrill Lynch, Charles Schwab, Morgan Stanley, and many others.  Ryan is currently working as a writer and financial modeling consultant on hedging and capital appreciation strategies, and does not own securities in the companies being covered.

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