eBay (NASDAQ:EBAY) has been around the block with activist investors. In 2014, Carl Icahn pushed eBay to spin-off PayPal, unlocking incredible amounts of value for shareholders. Nearly five years later, PayPal’s market capitalization is three times greater than eBay’s.
Activist investors have once again arrived at eBay, with both Elliot Management and Starboard Value taking stakes in the company in an effort to elicit changes. It is no secret what the activists want. In January, Elliott published a detailed letter to the eBay board laying out three principal suggestions for the company:
Sell or spin-off the StubHub and Classifieds businesses Improve margins in eBay’s eCommerce Marketplace business Increase stock buybacks and initiate a dividend
Responding to these suggestions, eBay announced it would conduct a strategic review of its assets including StubHub and Classifieds that could result in a sale of the businesses. In addition, eBay is adding representatives from Elliott Management and Starboard Value to its board of directors.
These actions suggest that the activists’ plan has traction with eBay management. The question for the remaining shareholders is whether or not the plan will create value.
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What could the StubHub and Classifieds businesses be worth?
The boldest proposal made by the activists is that eBay’s StubHub and Classifieds businesses should be sold or spun-off. They argue that not only are the two segments clearly non-core to the e-Commerce Marketplace business but also that they could be monetized for a large sum.
The first business that Elliott wants eBay to consider selling is StubHub, a marketplace that enables people to resell event tickets (i.e. concerts or sporting events). StubHub pioneered the online ticket resale market before eBay acquired it in 2007. Under eBay’s control, StubHub has continued to grow at a rapid clip and is the market leader.
In Elliot Management’s letter to eBay, the activist notes that StubHub could be worth between $3.5 billion to $4.5 billion in a sale, based on the value of other recently sold online ticketing businesses. eBay doesn’t disclose financial information on the StubHub business other than its annual revenue figure, but if Elliot’s assumptions with respect to the company’s earnings are correct (or at least close), StubHub could drive significant value.
Elliott also wants eBay to sell Classifieds, a collection of websites that list advertisements for local businesses that operates more or less like an online version of local newspaper classifieds. Like StubHub, Classifieds is growing at a healthy double-digit rate.
Elliott believes the Classifieds business could be worth between $8 billion to $12 billion in a sale. Elliott uses a similar technique described to derive its valuation as the one it used for Stubhub, primarily based on assumptions for Classifieds’ earnings and valuation. Again, Elliott’s math is hypothetical but is probably directionally accurate.
In advocating for these two spinoffs, Elliott is making a simple but very powerful argument that eBay’s collection of business could be worth more if stripped out and individually sold. This was true in the case of Paypal. eBay’s management clearly believes the idea is worth exploring and has announced a strategic review process to assess whether or not the company should sell the businesses.
Improving eBay’s Marketplace business
It is no secret that eBay’s Marketplace business has underperformed in comparison to Amazon (NASDAQ:AMZN). Although both eBay and Amazon have operated eCommerce websites since the early days of the internet, Amazon has built a much larger platform. In recent years, Amazon’s revenue growth has continued to exceed a double-digit rate while eBay has grown at a much slower pace.
EBAY Operating Revenue (Quarterly YoY Growth) data by YCharts
In an effort to catch up to Amazon, eBay has ramped up spending in all aspects of its business to both improve its technology platform and reaccelerate growth. Specifically, eBay has increased spending in product development, corporate headcount, and marketing. Unfortunately, eBay has failed to close the growth gap with its rival. Seemingly, the only thing eBay has managed to do is depress margins.
EBAY Operating Margin (TTM) data by YCharts
Elliott Management’s letter pointed out the disparity between spending and growth at eBay. The activist suggests that some of the increased spending must be wasteful and urges the company to cut back and improve profit margins.
Elliott’s plan for cost-cutting in eBay’s Marketplace business is logical but may be misguided. On one hand, Elliott chastises the company for not innovating and growing as fast as Amazon. On the other hand, Elliott wants eBay to be more profitable. This is despite the fact that Amazon spends enormous sums of money on growth and has never shown large profit margins.
In February, eBay announced a cost-cutting program to improve the efficiency of its technology spending, representing another win for the activists.
Adjusting capital allocation
The last major activist suggestion is that eBay should accelerate share repurchases and initiate a dividend. However, eBay has already been prolific in repurchasing its stock — from 2016 to 2018, eBay spent over $11 billion on stock buybacks. Even still, eBay has the capacity to buy back more stock because it generates healthy free cash flow and doesn’t have a debt-strapped balance sheet.
Despite how aggressive the company has been on repurchases, eBay again caved to activist pressure and announced it would repurchase an additional $7 billion of stock over the next two years. eBay anticipates burning through its cash balance to execute the accelerated repurchase program. What’s more, eBay announced it would start paying a quarterly dividend of $0.14 per share, giving the stock a 1.5% dividend yield.
The activist critique of eBay’s capital allocation isn’t a departure from what eBay has already been doing. The activists just want eBay to be more aggressive. This isn’t a bad idea given that eBay has plenty of cash and generates strong cash flows. Furthermore, if eBay is able to generate cash from asset sales, it will have even more ammo at its disposal.
eBay is an iconic tech company that has matured. The company hasn’t been as innovative as peers like Amazon, but it has still built a respectable eCommerce business and made lucrative investments in StubHub and Classifieds.
Activist investors see value in eBay’s collection of businesses. If the activists are right about the value of StubHub and Classifieds, it would probably make sense for eBay to sell those assets because they do not appear to add value to the eCommerce Marketplace business.
The plan to simultaneously make eBay’s Marketplace business more profitable and accelerate revenue growth is dubious. While eBay can certainly be more profitable, it is not clear whether the company can grow faster without somehow sparking innovation.
Finally, the idea that eBay should be more aggressive on share buybacks and dividends is fine so long as eBay doesn’t put itself into a precarious financial position. Based on the company’s current net cash balance and healthy profitability, the company appears to have solid financial footing that would support more buybacks and dividends.
The bottom line is that eBay’s stock price has stagnated in recent years while large tech stocks have boomed. It is probably a good idea for eBay to hear out fresh perspectives from engaged shareholders. Only time will tell if the new ideas will create value.