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Ebay (EBAY)
Will EBay Recover From Its Stumbles?
EBay has made a killing by learning how to put on a good auction. But when it comes to getting the best price for its own assets, the San Jose based giant doesn't do that great. Over the last couple of days, EBay announced that it is going to be getting rid of a couple of high-profile acquisitions that it made over the last few years, Skype and StumbleUpon. Granted it is a tough market to be selling anything right now, let alone fast growing businesses with a hazy revenue potential, but it doesn't look like Ebay shareholders are going to be getting a great deal for these properties. Ebay's stock has also been more than halved over the last year, so is the company's growth story essentially over?
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EBay capitalized heavily on the novelty of the auction mechanism as a way of buying and selling goods online. This novelty effect drew shoppers to EBay in the early part of the decade as online shopping started to go mainstream. Then the aura around auction based shopping wore off as more and more people realized that fixed price shopping might be more convenient (e.g. instead of putting in a bid and then coming back again and again to check if somebody had offered more money for the product you wanted, you could just pay the fixed price and be done with it and be guaranteed that you will indeed receive the product). So Ebay, under then CEO Meg Whitman, made a number of acquisitions in order to try to diversify its businesses. StumbleUpon (a recommendation search engine), purchased in 2007 for $75 million and Skype (a company that facilitates phone calls over the internet), bought in 2005 for $2.6 billion, are two examples. Ebay has decided to get rid of them both. StumbleUpon was sold back to its founders on Monday for an undisclosed price (aka, something far south of $75 million) and on Tuesday, Ebay announced that it's going to spin off Skype in an IPO sometime in the first half of 2010.
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StumbleUpon was relatively small, so no point dwelling over that, but Skype was a major mistake. EBay currently carries it on its books at a much reduced valuation of around $1.6 billion but has been unable to generate a bid approaching even that figure, hence the decision (or threat) to spin it off. Skype's founders are reportedly interested in buying it back and even though they have lined up some private equity money, they couldn't come up with an attractive enough bid. Regardless of whether Ebay actually ends up doing a IPO for Skype or is able to use the threat of an IPO to attract a higher price, Ebay is going to come nowhere close to recouping its initial investment in Skype. Skype is a good business, it generated $551 million in revenue last year, up 44% from 2007 and was able to eke out an operating profit of $115 million, but it's not a great business. At its core it allows users to make phone calls over the internet, but calls between Skype users are free (it charges for calls from Skype users to non-Skype users) and therefore, the more Skype users there are, the more calls will be free, hence growth in the user base doesn't have a proportionate impact on the topline. Plus, the big cable and telecom companies will probably eventually start offering a service similar to Skype in their bundles, so carving out a long-term niche for Skype is going to be hard (also see Vonage (VG: Charts, News, Offers) which offers a product that has some similarities with Skype, Vonage is now trading at 37 cents). Therefore, Ebay clearly overpaid for Skype and shareholders will suffer.
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But looking at EBay beyond Skype, CEO Jack Donahoe, has clearly decided that he will refocus the company on the core business of auctions and payment processing (i.e. PayPal, a rare example of a great EBay acquisition). There are clearly synergies between the two and EBay is going to exploit them as much as they can. The question is will it work? EBay is currently trading at $14.45. Some people will think it's a value trap (given the competition with Amazon (AMZN: Charts, News, Offers) which is on the top of its game) while others will think it's trading at a big discount given the fact that it generates a lot of cash, is relatively low risk, and doesn't have to deal with the hassles of storing inventory that a lot of retailers have to deal with as it just facilitates transaction. The answer is probably in the middle, EBay is probably trading at a discount right now (as are a lot of assets) but the long-term ceiling on EBay is lower than previously thought given the limitations of the auction model and Ebay's failure to diversify beyond it.
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