Daniel Loeb (Trades, Portfolio) founded Third Point LLC in 1995 and leads the firm’s research activities, portfolio, and risk management. He is well known for his public letters in which he criticizes company CEOs or other investment managers. Third Point’s total assets are more than $2.2 billion, and Loeb’s personal net worth is $2.3 billion. Loeb and Third Point focus on activist investing, and follows an event-driven, value-oriented investment style. Loeb identifies situations in which a catalyst will unlock value. Last quarter Daniel Loeb (Trades, Portfolio) increased his holdings in eBay (EBAY, Financial) by 122%. He currently holds 10 mn shares of the company. Here's a look at the company in detail.
Company overview
EBay Inc. is a global technology company that enables commerce through three reportable segments: Marketplaces, Payments and Enterprise. Its Marketplaces segment includes in eBay.com platform and its localized counterparts and the other online platforms, such as the online classifieds sites and StubHub. The Payments segment is comprised of its PayPal business. The Enterprise segment includes the Magento business and provides commerce technologies, Omni-channel operations and marketing solutions for merchants of all sizes that operate in general merchandise categories.
Financial overview
The following table shows revenue and profitability of the company over the last three years (Source: 10-K filing).
The company's revenues increased from 14.07 bn in 2012 to 17.90 bn in 2014. In the same period, its income from operations increased from $2.89 bn in FY2013 to in $3.51 bn in FY2014. While the company's GAAP EPS showed a sharp decline in 2014, it was due to one time deferred income tax provision of $2.99 bn for the cash which eBay is holding overseas. Sans this provision, the company's EPS was up in FY2014 versus FY2013.
Investment argument
2014 was a difficult year for eBay. The company’s marketplace business faced several headwinds.The Password hack which happened in May 2014 and ensuing password reset significantly impacted traffic. While eBay’s loyal customers were back following the reset of password, more occasional customers didn't returned as quickly. Further, the company's SEO changes significantly diminished eBay's presence in natural search results which impacted new user growth in the second half of of 2014. Also, a stronger U.S. dollar impacted eBay's cross-border trade, depressing U.S. exports and affecting fourth quarter results.
Despite of these headwinds, the company's revenues were up 11% year-over-year and its adjusted EPS increased 9% year-over-year. The company generated a free cash flow of $4.4 billion and bought back $4.7 billion worth of shares, reducing its share count by 5%.
Going forward, 2015 is a transition year for the company. The company plans to separate its eBay and Paypal businesses. Management is working on the operating agreement between the two companies. Their guiding principal in terms of operating agreement is to provide each business with a strategic flexibility to maximize its independent potential while maintaining the synergies that have captured and created over the year. In addition, eBay is also pursuing the sale or IPO of the eBay enterprise business so that it can focus on it two core business.
Management has guided for a 2015 revenue between $18.6 billion and $19.1 billion, representing forex neutral growth of 7% to 10% .The company is expecting forex to impact revenue by approximately $600 million as the U.S. dollar has strengthened versus the euro, pound and Australian dollar. Management expects non-GAAP EPS of $3.05 to $3.15, up 3% to 7% versus 2014 and free cash flow of greater than $4 billion. Segmentwise, Paypal, Marketplace and Enterprise business revenue growth are expected to be between 15% to 18%, 0% to 5%, and 5% to 8%, respectively on a forex neutral basis. Management expects to eliminate 2,400 positions across the company, reducing 7% of the global workforce. The company also expects to continue making opportunistic purchases of its shares.
EBay is trading at 18.70 times FY2015 consensus EPS estimates. According to sell side estimates, the company’s revenues are expected to grow 6.20% in the current year and 10.50% next year. Out of 41 analysts covering the company, 19 are positive and have buy recommendations, 20 have hold ratings and two have sell ratings. EBay is one at the best in class ecommerce and payments company. Although the company is facing some headwinds of late, most of them are temporary. The company's longer-term growth outlook remains solid. Further, the separation of the three business – ecommerce, payments and enterprise – will unlock value for the shareholders in the short term. The stock looks attractive given the company's long term growth potential and reasonable valuation.
