Stock Valuation – Ebay

posted by Nima

December 21, 2008 · Posted in Business

Below we shall evaluate a fair stock price for Ebay.

Free Cash Flow per Share:

Annual Growth Rate:

From 2004 through 2007 Ebay has been growing at an average annual growth rate of 32%
Through 2008, free cash flow has been declining slowly from quarter to quarter, but remains remarkably strong in light of the current economic woes
The slowdown in overall consumer credit will certainly hurt ebay
However, it needs to be pointed out that EBAY is not a seller of products, ebay is a business that facilitates auctions between buyers and sellers; as individuals consolidate their finances they will sell more items on ebay; thus I expect this consolidation effect to counterbalance or at least dampen the effect of the decline of overall consumer demand.
EBAY is also well positioned internationally and derives a significant portion of its income abroad, balancing our the negative effects of dollar weakness to the shareholders
EBAY has a remarkably high ratio of shareholder’s equity to debt of 10:3, where all liabilities are short term liabilities such as accounts payable and $0.00 in long term debt, virtually shielding it from the current financial crisis
To be safe we shall assume that EBAY’s FCF will remain stagnant over the next 5 years and rise at a perpetual rate of 1% thereafter

Confidence margin:

Due to high volatility over the past 4 years, we shall apply a confidence margin of 50% to this profit expectation

Price:

Applying the valuation formula to the assumptions stated above, EBAY’s fair stock price computes to $108.73
It is, without a doubt, very reasonable to be bullish for EBAY at its current price of $14.45