June 30, 2015
eBay (EBAY: Nasdaq)
By Evercore ISI ($61.04, June 28, 2015)
On Friday following the market’s close, eBay announced that its board approved the separation of PayPal from eBay with stockholders receiving one share of PayPal for each share of eBay owned in a pro rata distribution.
As such, we are releasing our updated sum-of-the-parts valuation and forecast by segments, which does take into account a slightly higher revenue growth outlook for PayPal consistent with management’s roadshow presentation leading into this distribution event. In terms of process, the distribution of shares is scheduled to occur on Friday July 17, earlier than expected, with PayPal beginning trading on Monday July 20. Also notable is that beginning on or about July 6 and continuing up to and through the distribution date, two markets in eBay (ticker: EBAY ) common stock are expected, where shares will trade “regular-way” and without entitlement to the PayPal distribution.
Our sum-of-the-parts valuation of $55 (revised from $50) assigns $32 per share to PayPal and $22 for Marketplaces. These segment values are derived through respective discounts of cash flow in which free-cash-flow terminal multiples of 12 times and 10 times are assigned in the final year, respectively. Moreover, in the case of eBay at least, we suspect the likelihood for a more substantial share repurchase (up to 20% allowed in the first two years) could yield more upside than our target currently identifies, mitigating some of the competitive risks that the business faces, at least from a valuation standpoint. In our revised sum-of-the-parts valuation, we allocate net cash by segment according to the disclosed capital allocation, whereby PayPal receives about $6 billion while eBay takes the remaining about $8 billion along with eBay’s $6.8 billion in long-term debt (equaling $1.2 billion in net cash). Note, for simplicity, this does not penalize eBay for the repatriation of their offshore cash holdings (about $2.50 per share).
In terms of estimates, for PayPal, we are modeling free cash flow to increase at a 15% five-year compound annualized growth rate (CAGR) from $1.8 billion this year, which places free cash flow at about 25% of revenue in the outer years, or 0.7% of volumes (total payment volume (TPV)). Meanwhile, TPV and revenue are forecasted to increase by 78% and 52%, respectively (this is from 2015 to 2020, CAGR for this period is 12.3% and 8.8%, respectively), over this same period, the latter more consistent with management’s outlook, which presumes trends stay relatively intact with no major disruption.
For eBay, we project a more modest 5.1% free cash flow CAGR through 2020, increasing from $2.2 billion this year (the midpoint of guidance) to $2.8 billion in 2020, once again driven by low-single-digit top-line growth. Moreover, as we mentioned before, there is the potential for additional per share appreciation through expanded buyback. Our revised $55 target (up from $50), implies eBay can trade at 11 times estimated 2016 free cash flow of $2.3 billion and PayPal can trade at 15 times estimated 2016 free cash flow of $2.2 billion, or 15 times on a consolidated basis.