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20 March 2014

Summary company financials ($m)

Year end December FY2011 FY2012 FY2013 FY2014E
Price $57.30 Revenue 11,652.0 14,072.0 16,047.0 19,755.8
Market cap ($m) 75,234.9 18.9% 20.8% 14.0% 23.1%
Enterprise value ($m) 66,269.4 EBITDA 3,313.0 4,088.0 4,771.0 6,519.4
28.4% 29.1% 29.7% 33.0%
Free float 92% Net income 3,229.0 2,609.0 2,856.0 4,118.4
Daily val traded ($m) 291.37 Net debt (cash) -3,839.0 -4,889.0 -4,902.0 -8,965.5
EV/Sales 2.88 4.19 3.87 3.35
EV/EBITDA 10.1 14.4 13.0 10.2
PE 12.3 25.7 25.2 18.3
eBay Inc.
Revenue growth
EBITDA margin
Ebay Inc is an internet commerce business with two core divisions. The first division, Ebay.com and its related subsidiaries, comprises the
world's largest auctions business by a clear margin at more than 8 times the number of active users of its nearest direct competitor, ebid.net.
The remaining division, PayPal, is the world's leading e-wallet company at between 2 to 4 times the size of its nearest competitor, depending
on the measurement metric used. Whilst Ebay.com produces around two thirds of Ebay Inc's EBITDA, PayPal's growth is around twice the rate
of Ebay.com, and may accelerate as the shift in payment platforms from credit/debit cards to mobile and wearable devices, in its infancy
today, gathers pace. Ebay Inc equity trades at 14.5x consensus PE to YE 2016. However, our judgement as laid out in this note, is that PayPal
revenue growth may exceed estimates, leading to a YE 2016 PE ratio between 12x and 10x, depending on the PayPal growth outcome

If we consider first, Ebay.com - with last reported annual revenue growth at 12%, Ebay.com contributes just over 50% of group revenue but
two thirds of group EBITDA. Whilst technology advances continue to encourage structural shift to internet based retail, we would see the
outlook in terms of Ebay.com's contribution to Ebay Inc to continue to grow steadily, but without the high teens growth rates of the past. For
an essentially uncontested online auction business such as Ebay.com, the scale benefits that acrue to the market leader raise high barriers to
entry and for this reason we would expect Ebay.com to be able to defend its position for some time.

PayPal on the other hand is growing annual revenue at 22%, and may see revenue acceleration. According to our research, PayPal currently
has no near term challenger to its market leadership. In 2013, PayPal processed $180bn of internet and mobile transactions. Of this amount,
$54bn related to Ebay.com transactions, and the remainder, $126bn, was third party ecommerce and mobile. The $126bn third party
transactions represented a growth rate of more than 30% relative to the equivalent 2012 figure. Of the total processed, $35bn was through
PayPal's mobile payment app, and this figure represents a growth rate of more than 150% relative to the equivalent 2012 figure. PayPal
conducts transactions in 196 global regions and 26 currencies.

Let's see how PayPal's competition currently stacks up:
1) Amazon Payments. In 2013, Amazon Payments processed $74bn of internet transactions, less than half of that of PayPal. Of this amount,
however, we believe more than 90% was conducted for transactions occuring at Amazon.com with limited third party transactions. Amazon
Payments has no mobile app so none of this amount represents transactions from a mobile platform. We wonder how much strategic focus
Amazon Payments has from Amazon's leadership. "Amazon Payments" is not mentioned once in the company's most recent annual report,
and whilst an imperfect measure, its Twitter account has just 6% of the follower count of PayPal.
2) Square. In 2013, Square processed approximately $17.5bn of mobile transactions. This is just half of the transactions processed by PayPal
mobile, but more importantly, PayPal mobile is now outgrowing Square - PayPal mobile grew at 150% in 2013 whereas Square grew at 120%.
Perhaps related, Square is understood to have cancelled plans for a Q1 2014 IPO, due to problems with its "revenue run rate", according to
sources who disclosed the story to Fox Business News.
3) Google Wallet. Whilst we do not have the payment data, Google's app store says just 10 million copies of its Google Wallet have been
downloaded since launch, we assume only a percentage of these are in active use, and this compares to 143 million active accounts at
PayPal. According to press reports, Google Wallet head Osama Bedier left the company in 2013 following lacklustre performance and other
high profile departures.
4) Apple. Apple's iTunes stores has the debit card details of 575 million customers, significantly larger than PayPal's 143 million active
accounts. It is frequently suggested that Apple may launch a payment product, however, at current no product has been launched and Apple
has no history nor experience in the payments business which would involve not just software design but also international cooperation with
regulators and retailers. We'd also note that although Apple's iTunes store has more customers accounts than PayPal, transactions processed
through iTunes were $31bn in 2013, relative to $180bn processed through PayPal.

Like credit card companies, PayPal charges the seller a fee of about 3% of the transaction, but a distinction is that PayPal account holders are
encouraged to fund payments with checking accounts, which let PayPal avoid having to remit that 3% fee right back to credit-card-issuing
banks. The direct link to bank accounts is an advantage that Amazon, Square, Google and Apple lack. Due to this difference in achievable
margin, each point of share that PayPal takes from the market is worth multiples more to PayPal equity holders than it was to the competitor
it was taken from. Put another way - PayPal's competition can not currently match the economic benefit it gains (and can therefore justify
spending) on each customer or retailer account acquisition.

The mobile payments market is estimated to grow by 155% to YE 2016. Assuming PayPal's share of the market remains constant, the group
trades on the 14.5x consensus PE 2016. However, the $180bn of payments that PayPal transacted in 2013 compares to $8.5 trillion of
payments transacted by Visa, Mastercard and American Express. Looked at as one market with the credit card companies, PayPal has a 2.1%
market share. Assume PayPal's share rises to 3.4% by 2016, Ebay Inc trades at 12x PE 2016. If PayPal's share rises to 4.3%, Ebay Inc's PE moves
to 10x. Given the investment by companies such as Apple, Samsung and Google in next generation mobile and wearable hardware, there is
every opportunity for mobile payments to take more share from traditional payments than the current growth estimates assume.