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  1. 1. eBay Inc. 1 Thinh Tran Tu Nguyen John Koong Naco Chen George Chou
  2. 2. eBay Inc. 2 TABLE OF CONTENTS TABLE OF CONTENTS…………………………………………………………………….…..1 • A BRIEF HISTORY AND BACKROUND OF EBAY...………………………………......2 • MISSION STATEMENT…………………………………………………………………….2 • TRADING PLATFORM…………………………………………………………………….2 • MARKETPLACE………………………………………………………………….................2 • BOARD OF DIRECTORS…………………………………………………………………..3 • OWNERSHIP INFORMATION…………………………………………………………....4 • FINANCIAL RATIOS/CHARTS AND GRAPHS…………………………………………5 • HOLDING PERIOD RETURN……………………………………………………………..14 • FREE CASH FLOW/EQUITY……………………………………………………………...15 • MARKET EFFICIENCY……………………………………………………………...…….17 • RISK ANALYSIS………………………………………………………………………….....20 • COST OF EQUITY…………………………………………………………………….…….21 • COST OF CAPITAL………………………………………………………………….……...21 • CAPITAL STRUCTURE…………………………………………………………………….22 • M&M PROPOSITION CHART………………………………………...…………………..23 • STRENGTH AND WEAKNESSES…………..……………………………………………..24 • FIVE YEAR STOCK PRICE……………………………………………………………......25 • ANALYST RATINGS…………..……………………………………………………………26 • HOLD/SELL/BUY RECOMMENDATION…….………………………………………….27 FINANCIAL STATEMENTS REFERENCES………………………………………………0000 MSN MONEY REFERENCES
  3. 3. eBay Inc. 3 eBay Inc. eBay Inc. was formed as a sole proprietorship in September 1995 and was incorporated in California in May 1996. In April 1998, eBay reincorporated in Delaware and in September 1998 we completed the initial public offering of their common stock. Their principal executive offices are located at 2145 Hamilton Avenue, San Jose, California, 95125. eBay’s Mission eBay’s mission is to build the world’s most efficient and abundant marketplace in which anyone, anywhere, can buy or sell practically anything. They pioneered online trading by developing an Internet-based marketplace in which a community of buyers and sellers are brought together in an entertaining, intuitive, easy-to-use environment to browse, buy and sell an enormous variety of items. Through their PayPal platform, they enable any business or consumer with email to send and receive online payments securely, conveniently and cost- effectively. eBay’s Marketplace eBay’s marketplace exists as an online trading platform that enables a global community of buyers and sellers to interact and trade with one another. Their role is to create, maintain, and expand the technological functionality, safety, ease-of-use, and reliability of our trading platform while, at the same time, supporting the growth and success of our community of users. eBay’s Trading Platform eBay’s trading platform is a fully automated, topically arranged, intuitive and easy-to-use online service that is available 24-hours a day, seven-days a week, enabling sellers to list items for sale in either auction or fixed-price formats, buyers to bid for and purchase items of interest, and all eBay users to browse through listed items from any place in the world at any time. The platform includes software tools and services, available either for no charge or for a fee, that allow buyers and sellers to more easily trade with one another. Our software tools and services — such as Turbo Lister, Seller’s Assistant, Selling Manager and Selling Manager Pro, which help automate the selling process; the Shipping Calculator, which makes it easier for buyers and sellers to calculate shipping costs; the eBay Toolbar, which helps eBay users stay connected with eBay wherever they are on the Internet; and PayPal, which facilitates the online exchange of funds — are all designed to make the trading process easier and more efficient.
  4. 4. eBay Inc. 4 BOARD OF DIRECTORS
  5. 5. eBay Inc. 5 Pierre M. Omidyar 36 Founder, Chairman of the Board and Director Margaret C. 47 President, Chief Executive Officer and Whitman Director Martin L. Abbott 36 Senior Vice President, Technology Matthew J. 39 Senior Vice President and General Bannick Manager, Global Online Payments William C. Cobb 47 Senior Vice President and General Manager, eBay International Rajiv Dutta 42 Senior Vice President and Chief Financial Officer Michael R. 49 Senior Vice President, Legal Affairs, Jacobson General Counsel and Secretary Jeffrey D. Jordan 45 Senior Vice President, eBay North America Lynn M. Reedy 48 Senior Vice President, Product, Development and Architecture Maynard G. 48 Chief Operating Officer Webb, Jr. Fred D. 59 Director Anderson, Jr Philippe 56 Director Bourguignon Scott D. Cook 51 Director Robert C. Kagle 48 Director Dawn G. Lepore 49 Director Thomas J. 49 Director Tierney
  6. 6. eBay Inc. 6 Shares Beneficially There is no relationship, as defined, between any of the above executive officers. Each of the above Owned (1) Name of Beneficial Owner Number Percent Pierre M. Omidyar(2) 114,525,88 4 17.5 % Jeffrey S. Skoll(3) 51,549,752 7.9 Margaret C. Whitman(4) 14,600,208 2.2 Maynard G. Webb, Jr.(5) 891,458 * Jeffrey D. Jordan(6) 797,934 * Matthew J. Bannick(7) 220,522 * William C. Cobb(8) 256,457 * Fred D. Anderson(9) 0 * Philippe Bourguignon(10) 210,000 * Scott D. Cook(11) 1,056,503 * Robert C. Kagle(12) 2,116,043 * Dawn G. Lepore(13) 157,500 * Thomas J. Tierney(14) 0 * All directors and executive officers as a group (16 persons) 137,060,55 (15) 9 21.0
  7. 7. eBay Inc. 7 FINANCIAL RATIOS ANALYSIS Growth Rates % Company Industry S&P 500 Sales (Qtr vs year ago qtr) 58.70 27.80 11.20 EPS (YTD vs YTD) 92.10 NA 31.20 EPS (Qtr vs year ago qtr) 92.10 NA 31.20 Sales (5-Year Annual Avg.) 82.55 16.51 5.12 EPS (5-Year Annual Avg.) 109.17 NA -3.24 Dividends (5-Year Annual Avg.) NA NA 1.71 Financial data in U.S. dollars Growth Rates are used to measure future growth of the firm. Growth is measured with Sales, EPS, and Dividends. Compound annual growth rate for the number of full fiscal years shown. If there is a negative or zero value for the first or last year, the growth is not meaningful. Investors need to know how much products or services a company sells, and how much of the profit is retained and used to grow its business or return to shareholders. The higher the retained earnings and dividends, the better. In general, eBay has higher growth rates then both the industry and the S&P 500. Growth in sales shows how much more goods and services a company has sold compared to last year. This is important information because it shows if the company has improved its goods/services or if they are more aggressively marketing their goods/services. eBay’s has a very high sales growth rate of 58.70 which is more then double the industry and more then 5 times that of the S&P 500. Sales growth percentage is Excellent. Earnings per share is the amount of retained earnings divided by the total number of shares outstanding. The higher the EPS, the higher the retained earnings over shares outstanding. eBay has a very high EPS (YTD vs. YTD) of 92.10 compared to the S&P 500 of 31.20 which is almost triple. eBay’s EPS is Excellent. eBay does not give dividends. This could signal that eBay is a very high growth company because eBay uses its retained earnings to reinvest into the company. Looking at sales, EPS, and dividends, eBay is a very high growth company with Excellent Growth Rate.
  8. 8. eBay Inc. 8 Price Ratios Company Industry S&P 500 Current P/E Ratio 82.1 NA 21.3 P/E Ratio 5-Year High NA NA 64.8 P/E Ratio 5-Year Low 49.6 NA 16.5 Price/Sales Ratio 19.12 4.73 1.49 Price/Book Value 9.67 5.64 2.91 Price/Cash Flow Ratio 71.60 89.90 12.70 Financial data in U.S. dollars Price ratios conclude a company’s standing value to the entire market place and can determine the risk of a company and the potential growth of its earnings. A company's P/E ratio is computed by dividing the current market price of one share of a company's stock by that company's per-share earnings. The higher the P/E ratio, the higher the expectation that earnings will continue to grow at a rapid pace. eBay’s P/E ratio of 82.1 is almost 4 times the S&P 500 P/E ratio of 21.3. eBay’s P/E ratio is Excellent. Price/Sales Ratio is the relationship of a company's stock price to its revenues per share. Usually investors will look for a lower Price/Sales ratio. This is because the lower the Price/Sales ratio, the more value you will get for your money. eBay has a Price/Sales ratio of 19.12, this means you have to spend $19.12 to buy $1.00 worth of sales. This is less value for your money when compared to the industry and the S&P 500 because the industry’s Price/Sales ratio is 4.73 and the S&P 500 sales/price ratio is 1.49. eBay’s Price/Sales ratio is Poor. Price/Cash Flow Ratio is the closing price divided by cash flow per share from the last 12 months. The higher the Price/Cash Flow Ratio, the more free cash the company has to spend either in investing in projects, paying dividends, or covering debts. Although eBay’s Price/Cash Flow Ratio of 71.6 is higher then the S&P 500 of 12.7, it is lower then the industry’s Price/Cash Flow Ratio of 89.9. eBay’s Price/Cash Flow Ratio is considered Fair. Based on the price ratios, eBay is a company that has moderate risk, but has very high growth expectations. Profit Margins % Company Industry S&P 500
  9. 9. eBay Inc. 9 Gross Margin 87.8 54.3 48.0 Pre-Tax Margin 29.3 1.2 10.9 Net Profit Margin 23.7 -1.9 7.2 5Yr Gross Margin (5-Year Avg.) 86.9 53.2 47.5 5Yr PreTax Margin (5-Year Avg.) 27.6 -66.6 9.2 5Yr Net Profit Margin (5-Year Avg.) 17.7 -66.7 5.6 Financial data in U.S. dollars Profit margins are a measure of how well a company manages their costs. Investors prefer companies that increase profit margins -- the percentage of sales that they keep -- every year. This is accomplished either by lowering expenses or raising prices. Companies consistently find ways to squeeze more profits out of sales than their competitors. Gross Margin is a broad measure of how much money eBay is making after COGS (costs of goods sold). eBay’s Gross Margin is significantly higher than both the industry and the S&P 500. In fact it is roughly double that of S&P 500 (87.8% vs. 48%). It would be fair to say eBay’s Gross Margin is Excellent. Net Profit Margin is a measure of eBay’s profit after all costs. As indicated by the chart above eBay is still profiting while the industry is in the red. The S&P 500 has a Net Profit Margin of 7.2% and eBay surpasses that number easily with 23.7%. eBay’s Net Profit Margin is Excellent. eBay’s Profit Margins show that it managing is cost very well, much better so than the industry and S&P 500. Overall EBay’s profit margin is Excellent. Financial Condition Company Industry S&P 500 Debt/Equity Ratio 0.00 0.22 1.23 Current Ratio 2.8 2.4 1.5
  10. 10. eBay Inc. 10 Quick Ratio 2.4 2.2 1.0 Interest Coverage 119.9 2.0 3.3 Leverage Ratio 1.2 1.7 6.0 Book Value/Share 8.15 3.03 11.77 Financial data in U.S. dollars Financial Condition shows how eBay handles debt and equity, and also current assets and current liabilities. The Debt/Equity ratio shows that eBay has very little debt. When the ratio is equal to 1 it means a company owes as much as it owns. Thus, a lower Debt/Equity ratio is preferred. eBay’s ratio of 0 is quite a bit lower than both the industry and S&P 500. eBay’s Debt/Equity Ratio is Excellent. The Current Ratio shows how easily a company can cover its liabilities with its assets. eBay’s Current Ratio of 2.8 is above the industry standard of 2.4 and well above the S&P 500 standard of 1.5. eBay’s Financial Condition is GOOD. Overall eBay’s financial condition is Strong. Investment Returns % Company Industry S&P 500 Return On Equity 12.0 NA 14.2 Return On Assets 9.9 -1.3 2.4 Return On Capital 12.0 -1.8 6.3 Return On Equity (5-Year Avg.) 7.2 NA 12.1
  11. 11. eBay Inc. 11 Return On Assets (5-Year Avg.) 6.1 -30.2 2.0 Return On Capital (5-Year Avg.) 7.1 -42.3 5.7 Financial data in U.S. dollars Return on Equity measures the return, expressed as a percentage, earned on a company's common stock investment for a specific period. The figure shows investors how well their money is being used by managers. This is calculated by taking Earnings after Taxes and dividing it by Shareholder’s Equity. eBay’s ROE is slightly lower than the S&P 500. eBay’s Return on Equity is Below Average. Return on Assets is calculated taking EAT and dividing it by Total Assets. This shows how much a company makes vs. how much put into it. eBay’s ROA of 9.9 is enormously higher than the negative 1.3 of the industry. It is almost 4 times that of the ROA of S&P 500. eBay’s ROA(5 Yr Avg) is quite a larger percentage higher than that of the industry’s which is a huge –30.2. eBay’s Return on Assets is Excellent. Overall EBay’s investment return ratio is FAIR Management Efficiency Company Industry S&P 500 Income/Employee 113,000 -6,000 23,000 Revenue/Employee 475,000 310,000 315,000 Receivable Turnover 8.9 10.5 7.1 Inventory Turnover NA 25.3 7.9
  12. 12. eBay Inc. 12 Asset Turnover 0.5 0.7 0.4 Financial data in U.S. dollars Management efficiency shows how well a company manages its assets and how productive its management staff is. The Revenue/Employee ratio shows much money each employee earns for the company. eBay’s ratio of 475,000 is greatly higher than both the industry and S&P 500. It shows that the management of eBay is more proficient at making its employees productive. eBay’s Revenue/Employee Ratio is Good. The Asset Turnover Ratio measure the efficiency of the usage of assets to generate sales. It is calculated by taking Sales over Total Assets. eBay’s Asset Turnover Ratio is lower than the industry by .2 times but is higher than S&P 500 by .1 times. eBay’s Asset Turnover Ratio is Average. Overall EBay’s management efficiency is Average. eBay primarily makes its money from listing, feature and final value fees collected from registered users who use an eBay site to auction and trade their goods such as antiques and art, books, business & industrial, cars & other vehicles, clothing & accessories, coins, collectibles, crafts, dolls & bears, electronics & computers, home furnishings, jewelry & watches, movies & DVDs, music, musical instruments, pottery & glass, real estate, sporting goods & memorabilia, stamps, tickets, toys & hobbies and travel.
  13. 13. eBay Inc. 13 REVENUE BY PRODUCT CATEGORIES INDUSTRIAL CAMERAS 4% JEWELRY 4% 5% MO TO RS TO YS 29% 5% HO ME/GARDEN 6% CO LECCTIBLES J 6% SPO RTS CO MPUTERS 7% 9% MO VIES/MUSICS C O NSUMERS/ELEC TR 8% CLO THING/ACCESSO O NICS RIES 9% 8% REVENUE BY CATEGORIES (in Million) MOTORS: $627.9 MOVIES/MUSICS: $173.2 TOYS: $108.5 COMPUTERS: $194.9 SPORTS: $151.5 JEWELRY: $108.5 ELECTRONICS: $194.9 COLLECTIBLES: $129.9 CAMERAS: $86.6 CLOTH/ ASSESSORIES: $173.2 HOME/GARDENS: $129.9 INDUSTRIAL: $86.6 eBay’s revenue comes from different categories as listed above; however, the major sources of its revenue are from : motors 29% ( $627.9 mil ), computers 9% ( $194.9 mil ), electronics 9% ( $ 194.9 ), cloth/accessories 8% ( $173.2 mil ), and movies/music 8% ( 173.2 mil ).
  14. 14. eBay Inc. 14 INDUSTRY COMPARISON OF RETAIL SPECIALTY MARKETS $60,000.00 $50,000.00 $40,000.00 DOLLARS (millions) $30,000.00 MARKET CAPITAL $20,000.00 $10,000.00 $- EBAY AMAZON COSTCO STAPLES BED BATH AND BEYOND COMPANY eBay has the largest capital market in the industry. The company has a market capital of $52 billion compared to its competitors Amazon with $19 billion, Costco with $18 billion, Staples with $13 billion, and Bed Bath & Beyond with $10 billion.
  15. 15. eBay Inc. 15 INDUSTRY COMPARISON OF RETAIL SPECIALTY MARKETS BED BATH AND BEYOND 9% STAPLES 12% EBAY 46% COSTCO 16% AMAZON 17% Last Trade: 82.33 Day's Range: 77.92 - 79.37 Trade Time: Jul 07 52wk Range: 49.87 - 94.13 Change: 1.14 (1.43%) Volume: 6,410,703 Prev Close: 79.47 Avg Vol (3m): 8,776,227 Open: 79.29 Market Cap: 51.49B Bid: 46.61 x 100 P/E (ttm): 82.11 Ask: 110.29 x 100 EPS (ttm): 0.954 Div & Yield: N/A
  16. 16. eBay Inc. 16 HOLDING PERIOD RETURN 2004 (12/31) 2003 2002 2001 2000 1.Background Analysis: . HPR = Ending Price – Beginning Price + Distributions  0.3775 0.9053 0.0138 0.0136 Beginning Price             Earnings growth rate estimate  (2004) 0.5906 Dividend 0 0 0 0 0 Price 86.71 64.61 33.91 33.45 33 HPR 0.3421 0.9053 0.0138 0.0136 (expected) 34.21% 90.53% 1.38% 1.36% The holding period return for eBay was calculated by taking the historical prices for ending 2000, 2001, 2002, and 2003 from: s=EBAY&a=08&b=24&c=1998&d=07&e=2&f=2004&g=m The year 2000, 2001, and 2002 ending prices were adjusted closing prices due to a 3-to-1 stock split in March 02, 1999, and a 2-to-1 stock split in May 25, 2000. The Holding Period Return is positive for the year 2001 through 2003. This means that investors who invested in EBAY has had a positive return on their investment for those years. EBAY is a relatively new company whose stock went public in September of 1998. For the first few years EBAY had a low HPR. For the year 2001 and 2002 eBay’s HPR was close to 1.4% and in 2003 its HPR rose sharply to 90.53%. This could be due to the fact that EBAY had many ongoing projects that unexpectedly had high payoffs. Considering the fact that sharp rise in 2003 was unexpected, EBAY is still a very high growth company and its estimated earnings growth rate estimate for 2004 is 59.06%. The HPR for 2004 is expected to be 34.21%. This is based on the assumption that the price of EBAY stock will reach $86.71 per share on Dec. 31, 2004. This estimate is based on the mean price target of market analysts shown in the chart below: PRICE TARGET SUMMARY Mean Target: 86.71 Median Target: 86.5 High Target: 105 Low Target: 68 No. of Brokers: 14
  17. 17. eBay Inc. 17 FREE CASH FLOW TO EQUITY 2.Free Cash Flow and Cost of Equity: .FCFE 2004 2003 2002 2001 2000 NI 441,771 249,891 90,448 48,294 (+)Deprecitaio n 159,003 76,576 86,641 38,050 (-)Capital Expenditures 581,751 161,907 166,323 49,753 (-)∆ in working capital 416,372 378,568 165,644 165,756 (+) ∆ in long- term debt 110,678 1,790 604 -3,614 FCFE -177,363 -286,671 -212,218 -154,274 -132,779 (Thousand (Thousand) (Thousand) (Thousand) (Thousand) ) Note: Capital Expenditures 581,751 161,907 166,323 49,753 Additions to property, plant, and equipment 581,751 198,081 169,150 49,753 (-) Disposition of property and equipment 0 36,174 2,827 0 ∆ in working capital = [(CA 02)- (CA01)]-[(CL02)-(CL01)] 416,372 378,568 165,644 165,756 CA 2,145,882 1,468,458 883805 675,464 465,307 CL 647,276 386,224 180,139 137,442 93,041 ∆ in long-term debt =LTD02- LTD01 110,678 1,790 604 -3,614 LTD 124,476 13,798 12,008 11,404 15,018 .Ke(Discounted cash flow (DCF) model) 2004(7/15) 2003 2002 2001 2000 FCFE P0=(FCFE1/Shares0)/(Ke0-G1) 12/31/2004 -177,363,107 -286,671,000 -212,218,000 -154,274,000 ke0=[(FCFE1/shares0)/P0] shares +G1 outstanding 657,400,000 649,293,000 311,277,000 277,259,000 G G1=(FCFE1-FCFE0)/FCFE0 12/31/2004 0.5906 -0.3508 -0.3756 -0.1619 P 7/15/2004 83.46 64.61 33.91 33.45 Ke(required return on equity) 0.5885 0.5797 -0.3780 -0.3985
  18. 18. eBay Inc. 18 The figures used in the calculation of Free Cash Flow to Equity such as Net Income, Capital Expenditures, Long-term Debt, and Depreciation were taken from eBay’s 2003 and 2002 10-K report. Please note that EBAY lists their Long-Term Debt and “Long-Term Obligations” in their 10-K report. The numbers were then plugged into the formulas that are stated in the above table to compute eBay’s Free Cash Flow to Equity. The cash flow for 2001 was -132,779, for 2002 -154,274, for 2003 -212,218, for 2004 -117,363, all numbers are in thousands. Our calculations came up with negative FCFE for the years 2000 through 2003, this is due to very large capital expenditures that eBay invested their cash into. Even though eBay’s Net Income increased each year, so did their capital expenditures. The cash flows for 2000-2003 were all negative, but the estimated growth rate for 2004 was positive. The FCFE for 2004 was still negative, but it is less then the FCFE for 2003. We then took the FCFE of EBAY and plugged it into the Discounted Cash Flow (DCF) model. Due to the face that the free cash flow to equity was negative, our calculations gave us negative ke for the years 2000-2003. This is not feasible because investors would not require a negative return.
  19. 19. eBay Inc. 19 MARKET EFFICIENCY eBay Inc. Announces Online Directory of Software and Services to Support Trading on the World's Online Marketplace --June 23, 2004 Source: cpath=20040623ACQBIZ200406230800BIZWIRE_USPR_____BW5033.htm&symbol=EBAY`&s elected=EBAY&logopath= %20News&consumer=NDQ&coname=eBay%20Inc.&market=NASDAQ-NM At the eBay Developers Conference in New Orleans on June 23, 2004, eBay (NASDAQ: EBAY) announced the eBay Solutions Directory, a new online directory of software and services that supports trading activity on the World's Online Marketplace. The new Solutions Directory gives eBay developers online destination to promote software and services that make it easier to buy and sell on eBay. The Solutions Directory and its features are the result of extensive feedback from the eBay community of users and third-party developers. The directory provides a reliable, one-stop showcase for the wide range of software and services provided by third-party members of the eBay Developers Program. It is available today at The eBay Solutions Directory helps buyers and sellers find software and solution providers that can improve their productivity and make their experience more enjoyable and effective on eBay. There are currently hundreds of third-party software solutions offered by members of the eBay Developers Program, many of which are expected to be listed in the directory. The directory categorizes solutions by feature and includes search, browse and sort capabilities making it easy for eBay users to comparison-shop among solutions and services. All members of the eBay Developers Program with commercial application programming interface (API) licenses are eligible to list their solutions in the directory, which provides an effective way to reach the eBay Community, and will help generate awareness and revenue for their solutions. The eBay Developers Program enables third-party developers to create innovative solutions that tap into the power of eBay, The World's Online Marketplace. Members of the program gain access to eBay's platform and technical resources to create a wide variety of solutions to meet the diverse needs of the nearly 105 million buyers and sellers on eBay.
  20. 20. eBay Inc. 20 Event Analysis Based on the chart of eBay, eBay’s announcement of online directory of software and services did not affect the eBay stock price. The chart clearly indicates that this market is a Weak-Form Market due to the fact that since the 20th of June, 2004, the stock price of eBay has continually risen until even after the announcement date of June 23, 2004, where it continues to rise even higher.
  21. 21. eBay Inc. 21 OPEC Confirms Oil Production Increase --June 3, 2004 Source: The Organization of Petroleum Exporting Countries, or OPEC, has confirmed plans to again increase its daily oil production to help fight rising oil prices. In an effort to lower crude prices from the $40-a-barrel range, the OPEC announced Thursday, June 3, 2004 that would increase oil output by 2 million barrels a day, to 25.5 million barrels. The production increase, the biggest in six years, takes effect July 1. OPEC will raise the group's quotas by 2 million barrels a day in July and another 500,000 barrels a day in August. Event Analysis The graph indicates that OPEC’s announcement slightly increased eBay’s stock price for 5 days. On the event date June 3rd, eBay’s stock price closed at $87.60. OPEC’s announcement increased eBay’s stock price by $1.40, closing at $89 on June 8th. EBay’s stock graph also indicates a No-Form Market. In conclusion, the increase of oil output announcement probably increased the amount of car sales eBay incurred during that period. However, the increase in oil output did not affect eBay’s stock price as dramatically as it would affect the automobile and airline industries. RISK ANALYSIS
  22. 22. eBay Inc. 22 2004 2003 2002 2001 2000 4. Risk Analysis: Beta eBay 1.5877 1.7072 2.7586 3.3931 Beta= COV(RIBM, RS&P500)/VAR(RS&P500) 2003 2002 2001 Unlevered Beta 1.51116863 2.5397764 3.116313646 [Equity/(Equity +((1-T)Debt))]* BetaEquity=Beta_unlevered Equity 4,896,242 3,556,473 1,429,138.00 Debt 923,892 483,753 249,391.00 Income from continuing operations before income taxes 661,500 398,133 162,943.00 Provision for income tax 206,738 145,946 80,009.00 Tax rate 0.3125 0.3666 0.49 2004(5/31) 2003 2002 2001 2000 .Ke (CAPM) Rf 0.0125 0.0102 0.0163 0.0386 Ke= Rf + Beta(Rm-Rf) Rm-Rf 0.0185 0.3206 -0.2261 -0.1511 Beta 1.5877 1.7072 2.7586 3.3931 Ke(required return on equity) 0.0419 0.5575 -0.6074 -0.4741 The company is currently underpriced because Ke( DCF model) > Ke(CAPM); 0.5823>0.0419 The Beta for eBay Inc. was calculated by taking the covariance of eBay and the S&P 500 Index and then dividing that number by the variance of the S&P 500 Index. The Beta was highest in 2001 and drops each subsequent year. The reason for such a high Beta in 2001 is because eBay is a relatively young company. As eBay matured its Beta dropped along with the increase of eBay’s assets. Unlevered Beta was computed by the formula listed under the term Unlevered Beta. Equity, debt, income from continuing operations before income taxes, provision for income tax, and the company’s tax rate were taken from the 10-K file. Unlevered Beta mirrors Beta by dropping each subsequent year.. ke was calculated using the Capital Asset Pricing Model. Again the formula is listed under k e (CAPM). There is a negative ke for 2001 and 2002. This is not realistic because how can anyone want a negative k e. Thus both the CAPM and DCF model would not be used to calculate ke. The company is currently underpriced because ke(DCF model) of 0.5823 is greater than ke(CAPM model) of 0.0419. COST OF EQUITY
  23. 23. eBay Inc. 23 In determining a value for cost of equity (ke), we examined a number of different parameters. As stated previously, the Discounted Cash Flow, CAPM model yielded a negative ke and is therefore unreasonable. eBay does not pay, so the Dividend model also can’t be used. Because three of these models failed, therefore we have to look at different sources to adjust ke. Because in eBay 10-K file does not provide enough information, that’s why analyzed the cost of debt (kd).using interest divide total long term debt to calculate k d The kd for the company was highest in 2003 and lowest in 2001. Due to the fact that a company with a higher k d and more debt carries more risk, it is reasonable to assume that ke should mirror these figures. So, by examining net income, interest expense, k d, and the 10-K file, we were able to make an estimate of ke. We assumed that ke2001 is 9%, ke2002 is 15%, and ke2003 is 24%. COST OF CAPITAL 5. Cost of Capital and Optimal Capital Structure: 2003 2002 2001 We= Equity/(Equity+Debt+Preferred Stock) 0.8413 0.8803 0.8514 Wd=Debt/(Equity+Debt+Preferred Stock) 0.1587 0.1197 0.1486 Wp=Preferrd stock/(Equity+Debt+Preferred Stock) 0.0000 0.0000 0.0000 Ke 0.2400 0.1500 0.0900 Kd 0.2347 0.1081 0.0347 Kp 0.0000 0.0000 0.0000 WACC=We*Ke + Wd*kd*(1-T)+ Wp*Kp WACC 0.2278 0.1402 0.0792 The equations and formulas below were used to calculate the cost of capital. WACC= We*Ke +Wd*Kd( 1 – T) +Wp*Kp We= Equity/(Equity +Debts + Preferred Stock) Wd= Debts/(Equity +Debts + Preferred Stock) Since eBay has not issued any preferred stock, Wp*Kp equals to zero. The Capital Structure of the Company is the sum of the value of the firm’s debts and its equity. The goal of the Optimal Capital Structure is to maximize the value of the firm and to minimize the firm’s weighted Cost of Capital. WACC is increasing for the years 2001, 2002, and 2003 ranging from 7.92% to 22.78%. Because based on eBay long term investment project, eBay get higher profit on every year that’s why eBay’s WACC keep increasing.
  24. 24. eBay Inc. 24 CAPITAL STRUCTURE 2001 Capital Structure 2002 Capital Structure 0.1486, 0.1197, 15% 12% Equity Equity Debt Debt 0.8514, 0.8803, 85% 88% 2003 Capital Sructure Industry Capital Structure 0.1587, 16% 18% Equity Equity Debt Debt 0.8413, 82% 84% eBay’s debts have decreased from 14.68% in 2001 to 11.97% in 2002, and increased to 15.87% in 2003. eBay’s debt is $249391 thousand and increased up to $923892 thousand in term of long-term debt. With the debts increased, the equity also increased from 2001 to 2003, with the debt increased from 2001 through 2003 but not much about 1%, which show that the company’s equity is still stable. And by comparing with Industry’s debt capital structure eBay’s debt is much lower than Industry’s debt, so the eBay’s debt position is still very good.
  25. 25. eBay Inc. 25 M&M PROPOSITION CHART eBay Capital Structure 0.25 0.2278 0.2 0.15 WACC 0.1402 WACC 0.1 0.0792 0.05 0 0.1 0.12 0.14 0.16 0.18 D/TA In year 2001 total assets of eBay consists of 85% equity and 15% debt. In year 2002 total assets of eBay consists of 88% equity and 12% debt. In year 2003 total assets of eBay consists of 84% equity and 16% debt. The capital structure of eBay’s debt to equity ratios has remained relatively stable over the past few years, showing a consistent use of debt financing. Using the three years of data to calculate the weighted average cost of capital (WACC), the figures have shown no significant change. In relation to M&M proposition, the WACC from 2001 to 2003 has shown a mode. Which is similar to (model 3) MM with tax, which includes bankruptcy and agency cost. Model 3 is the more realistic model in which a firm’s capital structure contains both debt and equity. Based only on 3 years eBay’s WACC computes for an Optimal Capital Structures at 0.1486. However, it is not a sufficient Optimal Capital Structure.
  26. 26. eBay Inc. 26 STRENGTHS AND WEAKNESSES eBay INC. was one of the premier online auction sites. Since it went public in Sept. of 1998, eBay has experienced very high growth and expansion of the services offered. eBay is a company that has very low debt and uses a high equity capital structure. This could be the reason that eBay has survived the internet bubble from the years 1999-2001. During this time many other internet companies or dot coms went out of business, but eBay still managed to turn a profit. Strengths Looking at eBay’s financial ratios, eBay’s main strengths lie in high growth, very low debt, and high profit margins. After analyzing eBay’s growth rates, we has assessed that eBay is an extremely high growth company. Also eBay has very high before and after-tax profit margins. This is due to the fact that eBay is an internet company that offers an online service. This gives them the freedom to go into different areas of auctions with very little cost. For example eBay added an eBay motors section to their auction site and was hugely successful and now provides 29% of their revenues. eBay has a debt to equity ratio of 0 which means eBay has very little debt compared to the amount of equity. This shows that eBay has a very strong financial condition. eBay has a very high profit margin because they have low operating costs which means they can generate more profits. Weakness The weakness of eBay includes a poor return on equity and negative free cash flow to equity. This might turn investors away. This could indicate that eBay in trying to focus on growth and expansion. The beta for eBay has decreased each year. The beta was relatively high in 2001 due to the fact that eBay was a young company and as they gained financial stability the beta has decreased to a fairly low beta of 1.59 from their beta of 3.3 in 2001. Overall eBay is a very financially stable and high growth company that has many strengths compared to very few weaknesses.
  27. 27. eBay Inc. 27 5 YEAR STOCK PRICE CHART eBay’s stock price was pretty steady when it first became public. The economy became bad around 2000 and eBay’s stock price fell accordingly. At the end of 2002 eBay’s stock price made a recovery and began skyrocketing upward from around $27 to about a peak of $92.
  28. 28. eBay Inc. 28 eBAY: ANALYSTS RATINGS Recommendations Current 1 Month Ago 2 Months Ago 3 Months Ago Strong Buy 9 9 9 10 Moderate Buy 1 2 2 2 Hold 8 6 6 5 Moderate Sell 0 0 0 0 Strong Sell 1 1 1 1 Source: Potential investors: The graphs suggest that investors buy eBay stock. Currently there are 9 analysts that recommend a strong buy and 1 analyst that recommends a moderate buy for potential investors. This would suggest that eBay stock is undervalued based on their estimated future earnings. Current shareholders: The expert analysts recommend that current shareholders hold their stocks and/or purchase more because the value of the stock is expected to increase. There is one analyst that recommends a strong sell.
  29. 29. eBay Inc. 29 BUY, SELL, OR HOLD? We recommend that investors BUY shares of eBay common stock It is apparent from our analysis of the financial ratios that eBay has high expected growth. The financial ratios show that the debt to equity ratio is 0 which means that the firm has very little debt. This is good because that means the company has a mostly equity based capital structure. Also eBay has very high sales and very high profit margins compared to the industry and the S&P 500. This means that eBay makes more money then their competitors. From our calculations of the Discount Cash flow Model, we yielded a Ke of about .5885 which is higher then the CAPM model ke of about .419. This shows that eBay stock is underpriced. This is an indicator to buy eBay stock because the stock price should increase and investors purchase more and more eBay stock. The HPR of eBay has been positive for the past 3 years even through difficult economical situations. The earnings growth estimate for 2004 is about 59 percent. This further supports that eBay will continue to grow and increase value for its shareholders. eBay has endured the internet bubble from 1999-2001 and while many other companies went under, eBay survived and has had huge expansion and growth in both aspects of growth in sales and revenues and expansions of operations into different areas on online auctions. The majority of expert analysts recommend a strong buy. Only one recommended a strong sell.