Activist Conundrum: What If eBay’s Great Turnaround Value Has Already Been Realized?

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eBay Inc. (NASDAQ: EBAY) has gone from a powerhouse auctioneer along with the great growth of PayPal in years past to a standalone internet giant lacking growth and having to sell itself as a value stock. eBay’s turn for the better has so far been seen in its share price, but the actual nuggets of the future have not yet come to pass.

Activist investor Elliott Management and Starboard Value have reached a settlement out of eBay. Along with a board seat for an Elliott representative, a sale or spin-off of the Stubhub and eBay classifieds unit are now under review.

While the formal announcement of the activist settlement news generated very little buzz, it is important to consider that eBay’s shares are now up 40% from its lows. It’s also important to consider that eBay was trading under $29 at the start of January. eBay’s shares are also up about 20% from when the news of an Elliott stake broke.

At the end of January, eBay decided to begin paying a dividend $0.56 per share on an annualized basis and that will generate a 1.5% yield for the shareholders buying or who own eBay at the current share price. eBay has plenty of earnings coverage as well, with consensus earnings estimates of $2.67 per share for 2019 and $3.05 per share for 2020.

eBay also had about $5 billion of cash and short-term securities at the end of the year. eBay plans to return close to $7 billion to shareholders via buybacks over this year and next, with about $5.5 billion of that taking place in 2019.

The company sees exiting 2019 with about $3.5 billion in cash and liquidity, and it recently added $4 billion to its buyback authorizations.

When eBay last reported earnings in January, its guidance for fiscal year 2019 was for adjusted earnings to come in between $2.62 and $2.68 per share and for revenues to be in a range of $10.7 billion to $10.9 billion.

eBay is among dozens of companies who want to win in online marketplaces, but it is without question that eBay is the absolute leader when it comes down to the public being able to auction off their own goods or participate in auctions open to the public.

eBay would still screen out as a value stock for most internet players which have a dominant position in their field. With a market cap of $34 billion after this year’s big run higher, eBay is currently valued at just 14 times expected earnings and just over three times expected sales.

The analyst community has yet to get solidly behind eBay of late. Even with the activist involvement, the current share price is rather close to most of the analysts with formal price targets.

Merrill Lynch responded to the news by raising eBay’s price objective up to $41 from $38, but keeping that Neutral rating doesn’t exactly exude the world’s strongest conviction. Merrill Lynch’s investing rationale also calls eBay a relatively defensive play on eCommerce’s secular growth, but also that it is increasingly underperforming the eCommerce sector with no clear easy fixes. The firm does remain constructive on eBay’s advertising opportunity and sees earnings upside from cost-cutting opportunities, but the worry about the total gross merchandise value deceleration is likely to keep weighing on the stock.

CFRA (S&P Global) did maintain its Buy rating and it has a $41 price target. The expects eBay to make progress on asset sales, but was disappointed that the operating review’s timeline was seven months or so. Still, CFRA sees more upside and views eBay as attractively valued.

What are investors supposed to think when they see research conflicts of this sort? Merrill Lynch was Neutral and CFRA was at Buy, but both firm’s have a $41 target. Other analysts are likely to update their models as more data and views become available.

Canaccord Genuity’s March Internet Dashboard showed a mere $33 price target for eBay.

Credit Suisse was more positive than most other analysts, reiterating its Outperform rating and $42 price target — back on January 30. The firm has included it in research since but has not made any apparent changes as of yet.

Trading at $37.35, eBay has a 52-week range is $26.01 to $44.30, and its consensus target price was $37.41.

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