Thursday, May 13, 2010

eBay (NASDAQ:EBAY): Turnaround Underway + 10% FCF Yield; Upgrading to Overweight - Morgan Stanley

Morgan Stanley is out upgrading eBay (NASDAQ:EBAY) to Overweight from Equal-Weight with a $32 price target.

Why upgrade eBay shares now? – Morgan Stanley believes eBay’s multiple will expand as management innovates + executes on their turnaround strategy. They are increasing C2011E estimates by 2% and upgrading their rating to Overweight with $32 DCF value.

Turnaround is turning – Their conviction lies in the belief that: 1) Marketplaces business has stabilized given recent trends; 2) PayPal’s outlook continues to improve owing to especially strong + accelerating growth in Merchant Services (off-eBay); and 3) the shares are now compelling due to a recent pullback. On C2010E, EBAY trades at a 10% FCF yield and at 7x EV/EBITDA vs. 6% / 15x eCommerce average.

Marketplaces (53% of CQ1 revenue and 76% of operating profit) – stabilizes as key initiatives around pricing, user experience and trust sustain eBay’s eCommerce share, and the shift from offline retail to online commerce provides a tailwind for revenue growth.

Payments (35% of CQ1 revenue and 24% of operating profit) – continues to post growth rates above market expectations as an increasing number of merchants and consumers choose PayPal as their payment platform of choice for a growing number of transactions.

At a 10% C2010E free cash flow yield, the market seems to be valuing eBay ex-growth. eBay’s multiple has contracted significantly over the past five years as investors have transitioned views of eBay from an open-ended growth story to a value stock. MSCO believes there is proof that the market’s areas of concern have been overstated and a 10% free cash flow yield now overly discounts the long-term opportunity.

Increased confidence in eBay's business outlook and management's ability to execute. Recent initiatives focused on improving the buyer and seller experience in the core Marketplaces and extending the PayPal platform to new merchants / customers / geographies / markets (mobile + social) have increased Morgan Stanley's comfort level with management’s strategic direction. As a result, they are more confident that eBay has the ability to turn its business around and regain its status as Internet innovator after several years of playing catch up.

Notablecalls: I would call this one an out-of-consensus call as the sentiment in EBAY has gotten really negative. Deutsche was out last week saying things had worsened at eBay over the past month.

Yet, Morgan Stanley is now out with a 54-pg (!) call saying they think the co is close to turning a corner. A real head turner from Mary Meeker.

I expect the stock to trade up 5-7% today, putting 23.50 - 24.00/share range in play today. Definitely an out-sized move for EBAY but I think the snap-back will be a violent one.

1 comment:

Anonymous said...

I Like the ebay and marketing