Big news for eBay (EBAY) investors. The activists are swooping in.
One of the world’s most aggressive activist hedge funds, Elliott Management, has just revealed a 4% stake in eBay- worth about $1.4 billion. The fund is headed by billionaire Paul Singer, a manager well known for his combative deal making skills.
In a letter to eBay’s Board of Directors, Elliott Management accused management of “underperforming its peers and the market for a prolonged period of time.” The fund has now outlined a plan for value-creating opportunities for the company.
“Despite its remarkable history as one of the world’s largest e-commerce platforms, eBay as a public-company investment has underperformed,” Elliott told the directors. “While eBay’s core Marketplace continues to enjoy sustained growth and the two other franchises that eBay owns, StubHub and eBay Classifieds Group, are thriving, eBay suffers from a deeply depressed valuation due to its history of misexecution.”
Interestingly, CNBC also reports that fellow activist investor Starboard Value has also built a stake in eBay- although at this time the details on this holding are still scarce.
Shares in the e-commerce giant surged over 7% on the news. However, in the last year, the stock has still lost almost 17% as the company struggles to differentiate itself from powerful rivals like Amazon.
The “Enhancing eBay Plan”
Elliott Management made an extensive list of recommendations for ‘enhancing’ the flailing company. There are five key components, namely:
1) Separate StubHub and Classifieds Properties: Separating these businesses could unlock greater value as independent assets. For example, as of 2017, popular ticker re-selling platform StubHub generated $1B (up 8% Y/Y) in revenue. Elliott values StubHub’s stand-alone business at $3.5 – $4.5B (vs. $2.2B as part of eBay).
Similarly, in 2017, eBay’s classified-ads business generated revenue of $897M (up 13% Y/Y) and could be worth $8B-$12B (vs. $4.5B as part of eBay today).
2) “Revitalize” Marketplace: Management to focus only on its core Marketplace platform with improved execution. After accounting for StubHub’s and Classified’s valuation, Elliott Management views eBay Marketplace’s current valuation at 5.7x EBITDA, making it cheaper than several companies in terminal decline.
3) Improve Business Operations That Could Lead To Margin Expansion: Invest capital efficiently, towards revenue-enhancing initiatives and cut spending in other areas.
4) Capital Allocation Strategies: Maturity and profitability of the business should allow for continued return of capital to shareholders.
5) Effective Leadership and Oversight: Maintain appropriate and efficient oversight of portfolio assets and operational improvements. This includes a “full operation review of how [the company] spends and develops its funds.”
In total, Elliott Management believes these steps could unlock greater value and could achieve $55 – $63 per share by the end of 2020. Right now the company trades at just $33.
eBay has responded by publicly stated that they will evaluate the fund’s proposals.
“We agree with many of the steps detailed by Elliott though we question if the recommended changes could lead to $55-$63 EBAY share price” writes RBC Capital’s Mark Mahaney (Track Record & Ratings). He isn’t surprised about the news, having previously singled out eBay as ripe for further activist activity (see RBC’s Top 10 Tech Surprises for 2019 covered here).
Encouragingly, Mahaney has tracked Elliott’s involvement in Akami since it publicly announced its involvement with the company on 12/15/17.
If history is a guide, then good news. Since 12/15/17 AKAM shares have appreciated 14% vs. a flat return for the S&P 500- in part thanks to the efficiency measures that Elliott recommended and his operating margin expansion plans.
However there are still concerns. For example, re: StubHub, the analyst is nervous that its outlook as a secondary ticketing platform is weakening as more event ticket sales are going digital, and artists/teams/venues aggressively work to recapture the economics of the secondary market.
Digging into the numbers, Mahaney generally agrees with the valuation range used by Elliott, though adds that he is more likely to be at the low end. Ultimately, however, the relatively high opex (51% of FY18 revenue) and SBC (5% of FY18 revenue) levels at eBay that Elliott points to are the correct areas of focus says the analyst.
“What is unknown to us is whether efficiencies gained in these areas can be effectively deployed towards successful product and marketing growth strategies” he adds.
Hold your horses
For the time being, the activist activity isn’t enough to prompt Mahaney to upgrade his rating. He still reiterates his Hold rating on the stock with a $31 price target (6% downside potential).
“eBay’s growth has underperformed Online Retail for years – and based on the company’s FY19 guidance – will continue to do so for the foreseeable future, and it’s very unclear to us how this can be changed without dramatic investment in the business” the five-star analyst explains.
Word on the Street
In contrast the top analyst consensus gives a slightly more optimistic outlook. Based on all ratings received over the last three months, eBay scores a ‘Moderate Buy’ consensus. That’s with analysts almost evenly split between buy and hold ratings. Meanwhile the average analyst price target stands at $37 (12% upside potential). (View EBAY Price Target & Analyst Ratings)
What’s also worth nothing is the very bearish sentiment on eBay from insiders- which paints a pretty bleak picture of how insiders rate the company. While hedge funds are piling in, insiders are heading one way: out.
TipRanks reveals that in the last year insiders have only sold the stock- which means that there have not been any informative buy transactions in over 12 months.
In fact in the last three months, insiders have sold $2.64 million worth of eBay stock. (View EBAY Insider Activity)
These sell ratings come from directors, SVPs and VPs- with director Pierre Omidyar selling over $1 million of stock in November. Even after this informative sell transaction, Omidyar still holds over a billion-dollars worth of eBay stock – so he hasn’t reduced his exposure too dramatically.