ebay (NASDAQ:EBAY) Presented by: Robert Brooker, Board of Directors, BetterInvesting

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1 EBAY (NASDAQ: EBAY) Presented on October 3, 2012 Presented by: Robert Brooker Board of Directors, BetterInvesting Real Time Q&A followed by Commentary by Tom Hudson, ebay Vice President of Investor Relations Disclaimer The information in this presentation is for educational purposes only and is not intended to be a recommendation to purchase or sell any of the stocks, mutual funds, or other securities that may be referenced. The securities of companies referenced or featured in the seminar materials are for illustrative purposes only and are not to be considered endorsed or recommended for purchase or sale by BetterInvesting National Association of Investors Corporation ( BI ) or its volunteer advisory board ( BIVAB ). The views expressed are those of the instructors, commentators, guests and participants, as the case may be, and do not necessarily represent those of BetterInvesting or BIVAB. Investors should conduct their own review and analysis of any company of interest before making an investment decision. Securities discussed may be held by the instructors in their own personal portfolios or in those of their clients. BI presenters and volunteers are held to a strict code of conduct that precludes benefiting financially from educational presentations or public activities via any BetterInvesting programs, events and/or educational sessions in which they participate. Any violation is strictly prohibited and should be reported to the President of BetterInvesting or the Manager of Volunteer Relations. 2 ebay s primary goal is to enable commerce (online and offline) In 2011, ebay enabled $148B in commerce volume Primarily a transactions-based business model Disclosure: Presenter owns ebay stock 3 4 SEGMENT - MARKETPLACES The world s largest online marketplace with 100m active users (arguably, Alibaba is larger but more limited to China) Mostly ebay.com, but also Classifieds, half.com, StubHub, acquired non-us sites with different names, etc. 25m sellers, 350m listings SEGMENT - MARKETPLACES Started as auctions for mostly used items (currently 4% growth) Now, 70% new items (20% growth) and 65% fixed price $68.6B of products sold through Marketplaces ebay does not disclose take rate but analysts estimate about 8% of goods sold 5 6 October 3,

2 MARKETPLACES WORLDWIDE SALES COMPARISON WITH TOP US RETAILERS (2011) 1. Wal-Mart $454B 2. Costco $89B 3. McDonald s $86B 4. Kroger $85B 5. Home Depot $70B 6. ebay $69B* Amazon.com $48B 7 *ebay is not considered a retailer because it does not carry inventory, but comparison with retailers can be useful for analytical purposes. Source: ebay IR website and STORES Magazine SEGMENT PAYMENTS (PayPal) PayPal was the largest online payment company when it was acquired by ebay ebay strongly encouraged use of PayPal in its Marketplaces, which drove strong growth Payments division books as revenue an average of 3.9% on sale price, plus interest on carried balances (BillMeLater) and other revenue streams 1/3 of PayPal volume is through Marketplaces PayPal has relationship with both buyer and seller (like American Express but unlike Visa or Mastercard) 8 PAYMENTS COMPARISON* Number of Accounts Worldwide Visa 2,000M Mastercard 1,800M PayPal 113M American Express 97M Discover 50M Room to grow, or vulnerability? *note that these companies employ different business models and are not directly comparable, but are useful as approximate comparisons 9 SEGMENT GSI GSI provides ecommerce and marketing services to merchants Expands scope of ebay s relationship with merchants beyond ebay s Marketplaces to other channels (e.g. powers merchants own websites, etc.) Though a small portion of ebay s current revenue, could grow quickly 10 GROWTH DRIVERS ebay expects to continue growth: As a beneficiary of strong growth in ecommerce generally Via ubiquity of internet via proliferation of smartphones (e.g. 8,600 cars bought through smartphones the other week). Via substitution of digital/plastic for cash/check solutions International (non-us presence; facilitating customs, currency, shipping for small sellers) Local delivery (experimental) 11 MOAT "One of the keys to finding superior long-term investments is buying companies that will be able to stay one step ahead of their competitors * What s the likelihood of another marketplace (e.g. Amazon, Alibaba) surpassing ebay in its market? What s the likelihood of another online payment system (e.g. Visa) surpassing PayPal? Network effects at play in both cases 12 * Morningstar October 3,

3 SKYPE WRITE-OFF OF $1.4B IN 2007 JUSTIFIES EXCLUDING THE YEAR, SINCE IT HAS NO RELEVANCE TO FUTURE PERFORMANCE UP, STRAIGHT AND PARALLEL? BEWARE OF R2 UNDER 0.85 W/O 2007, R2= 0.91 FOR SALES 0.92 FOR EPS GOOD! Operating Leverage Trend says up but really seems to bounce around between 23 and 34. Operating leverage unclear... Comparables Amazon (1.9%), Visa (61.6%), American Express (23.2%) Operating leverage can allow earnings to grow faster than revenue Growing revenue over fixed costs But sometimes not the case because of Changes in revenue mix Investments in future growth ebay expects overall margins to trend lower Similarly, il l ROE bounces around. ebay carries little debt. LOOKS GOOD! October 3,

4 HISTORIC REVENUES AND EPS Most indicators signal YES so we will continue the study and try to determine if the stock is available at a price favorable enough to achieve 12%+ annual appreciation for next five years EPS GROWTH ESTIMATES EPS GROWTH ESTIMATES Investor Advisory Service predicts average earnings growth of 14% annually for next five years (September 2012 issue) Company Name Price Div % Yld Est EPS Tot. Ret. % Gr. Curr P/E RV Buy Price ebay % % % Analysts Estimate from Toolkit TOOLKIT REPORTS ANALYSTS ESTIMATE OF 5-YEAR EPS GROWTH OF 11.9% Analyze Growth Revenue & EPS Let s choose 13.4% Note: Toolkit gets analysts estimates from Zacks Investment Research October 3,

5 Ecommerce Macro Picture EXPECTED P/E RANGE IN 5 YEARS Growth in US ecommerce 2011: 16.1% 2012: 15.4% Ecommerce totals only 4.2% of total US retail sales Is ebay revenue likely to trend with general ecommerce? Higher? Lower? Sources: US Dept of Commerce, e-marketer projection P/Es eliminated because of Skype write-off 2008/9 low P/Es of 8.0/5.4 eliminated, in expectation that the severe 2008/9 crisis is a non-recurring event Results in P/E range of 12.5 to 19.1 five years from now 26 As we try to set a high and a low future price, please keep this graphic in mind: The high 5-year price forecast will come from EPS growing 13.4% per year for five years ($4.61) times the high P/E of 19.1 = $88.10 PRICE EARNINGS X EARNINGS = PRICE The low 5-year price forecast will come from the EPS of the last 4 quarters ($2.46) times the low P/E of 12.5 = $30.80 This analysis shows that the current price is on the low end of the hold zone, with an upside/downside ratio of 1.9: October 3,

6 DETERMINING FIVE YEAR POTENTIAL Returns for EBAY based on recent price of $50.48: Commentary from Investor Advisory Service (Sep 2012) ervice.com POLL QUESTION Do you think the completed SSG is Too conservative? Too aggressive? About right? Tom Hudson, Vice President of Investor Relations at ebay, is available for additional comments and questions Thank You! Upcoming Stock Study: CATERPILLAR INC. (NYSE: CAT) GRETCHEN HURT Director, BetterInvesting Volunteer Advisory Board November 7, :00 PM ET October 3,