Recently, Susquehanna analyst James Friedman upgraded his rating on eBay (EBAY, Financial) to buy from neutral. He also raised his stock price target to $75, which implies significant upside from the current levels. Friedman is bullish about Paypal's business prospects once it demerges from eBay.
In addition to positive sell side commentary eBay has also seen a lot of interest from fund managers of late. Last quarter, Seth Klarman (Trades, Portfolio), Daniel Loeb (Trades, Portfolio), Larry Robbins (Trades, Portfolio), Leon Cooperman (Trades, Portfolio), NWQ Managers (Trades, Portfolio), Jana Partners (Trades, Portfolio), PRIMECAP Management (Trades, Portfolio), Murray Stahl (Trades, Portfolio), RS Investment Management (Trades, Portfolio) and Louis Moore Bacon (Trades, Portfolio) increased their stake in the company.
Ebay has seen a good increase in its profitability over the last few years. The company's revenues increased from $14.07 billion in 2012 to $17.90 billion in 2014. In the same period, its income from operations increased from $2.89 billion in FY2013 to $3.51 billion in FY2014. 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 been 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 of the best in class ecommerce and payments company. 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.
