Upside & Downside Risks for eBay's Stock

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eBay's ( EBAY ) two most important businesses are eBay Marketplaces and PayPal, accounting for 49% and 21% of  the $32.81 Trefis price estimate for eBa y.  eBay Marketplaces is the company's core business of online commerce which happens through eBay.com, Half.com, Rent.com, Shopping.com, and eBay-owned classifieds websites.  PayPal is eBay's global payments platform that enables secure, easy, quick, and cost-effective transfer of payments online.

Here we highlight 4 of the most important drivers for eBay's business and the upside as well as downside risk posed for eBay's stock based on these drivers.

1.  eBay Transaction Take Rate:  eBay's commission (also known as "take rate") on items sold through its marketplaces business is currently about 8%.

2. Marketplaces EBITDA Profit Margin:  eBay has EBITDA profit margins of about 36% in its marketplaces business.

3. Payments per Account on PayPal:  The average PayPal account holder transacts slightly more than once per month through PayPal

4. PayPal EBITDA Profit Margin: eBay has EBITDA profit margins of about 20% in its PayPal business.

30% Upside Scenario: $43 Trefis Price Estimate for eBay

1. Stable Transaction Take Rates (+5%) :  We currently forecast that eBay's transaction take rate, representing eBay's commission on items sold, will decrease from about 8% in 2010 to 7% by the end of the Trefis forecast period.  We expect that eBay's discounts to power sellers, a changing mix of merchandise sold and competition from online retailers will put pressure on eBay's take rate.  However, eBay's transaction take rate has actually increased over the last few years and the company may be able to limit the negative impact of the factors we believe will influence the take rate.  There could be 5% upside to the Trefis price estimate if take rates were to remain stable rather than decline as we forecast.

2. Rebounding Marketplaces Profit Margins (+10%): We currently forecast Marketplaces EBITDA profit margin to increase from about 34% in 2010 to nearly 37% by the end of the Trefis forecast period.  There could be 10% upside to the Trefis price estimate if margins were to rebound to 2005 levels of about 46%.  The rebound could be driven by stabilizing take rates and a pick-up in transactions as the economy improves.

3. Rebounding Payments per Account (+10%): We currently forecast that the average number of payments per PayPal account will remain flat at around 1.3 over our forecast period despite on-going growth in PayPal's subscriber base.  A rebound in payments per account could occur if PayPal becomes more widely accepted as a form of payment online (including mobile) and consumer use rises.  There could be 10% upside to the Trefis price estimate if payments per PayPal account rebounded to 1.7 by the end of the Trefis forecast period.

4. Rising PayPal Profit Margins (+5%): We currently forecast PayPal EBITDA profit margin to increase from about 18% in 2010 to 24% by the end of the Trefis forecast period.  We believe that the growth in payment transaction volume as a result of PayPal's growing user base will drive the increase in profit margins and there could be 5% upside to the Trefis price estimate if PayPal profit margins were to reach 30% by the end of the Trefis forecast period.

35% Downside Scenario: $22 Trefis Price Estimate for eBay

1. Transaction Take Rates Dip Further (-5%) :  Although we already forecast take rates to decline from about 8% in 2010 to 7% by the end of the Trefis forecast period, take rates could potentially decline faster due to heavier discounts being provided to large volume sellers and competitive pressures from other e-commerce sites.  There could be 5% downside to the Trefis price estimate if take rates were to reach 6% by the end of the Trefis forecast period.

2. Marketplaces Profit Margins Continue Decline (-10%): Marketplaces EBITDA profit margins have fallen from 46% in 2005 to 31% in 2009.  We currently expect margins to increase from about 34% in 2010 to nearly 37% by the end of the Trefis forecast period.  However, pressure on eBay's take rates as well as rising costs could lead to margins continuing to fall.  There could be 11% downside to the Trefis price estimate if marketplaces margins were to fall to 25% by the end of the Trefis forecast period.

3. Falling Payments per Account (-15%): While PayPal's user base has grown, payments per account on PayPal has fallen as many new users are less active on average than existing users leading to decline in the average payments per account.  We currently forecast that the average number of payments per PayPal account will remain flat at around 1.3 over our forecast period despite on-going growth in PayPal's subscriber base.  There could be 15% downside to the Trefis price estimate if payments per PayPal account fell to 0.5 by the end of the Trefis forecast period.

4. Stagnating PayPal Profit Margins (-5%): We currently forecast PayPal EBITDA profit margin to increase from about 18% in 2010 to 24% by the end of the Trefis forecast period.  We believe that the growth in payment transaction volume as a result of PayPal's growing user base will drive the increase in profit margins.  However, there could be 5% downside to the Trefis price estimate if margins were to stagnate instead as the increase in PayPal's user base is offset by falling payments per account as described above.

See additional details for our analysis of eBay.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks , US Markets

Referenced Stocks: EBAY

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