Stock Valuation – Ebay

Below we shall evaluate a fair stock price for Ebay.

Free Cash Flow per Share:

  • EBAY’s FCF over the past 4 quarters was $2,456,160,000
  • EBAY has shares outstanding of $1,280,000,000
  • Thus the Free Cash Flow Per Share is $1.92

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




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