Consumer confidence may be sagging overall, but not at eBay
Revenues for the quarter came in at $413.9 million, up an amazing 88.7% from the year-ago quarter and topping analysts' consensus estimate of $390.9 million. Profits were equally strong at $87.6 million, representing an impressive 22.4% pro forma net margin. EPS of $0.28 was four cents better than analysts' expectations. That plus strong guidance for 2003 has lifted the stock better than 3% in the early going today.
Breaking down the results a bit farther, there were several noteworthy data points:
International growth -- The strong fourth-quarter growth was largely due to strength in international operations, where transaction revenue increased 173% year over year to $107.4 million. As such, the international segment now accounts for 27.1% of total transaction revenue.
Strong gross merchandise sales (GMS) -- eBay's revenue is comprised of commissions paid on transactions, but strength in the business can also be seen in the total value of items sold, which is called gross merchandise sales, or GMS. In the fourth quarter, users transacted a record $4.60 billion in GMS, up 68% over the year-ago quarter. On an annualized basis, eBay now has five categories that generate more than $1 billion in worldwide GMS: eBay motors at $4.3 billion, computers at $1.9 billion, consumer electronics at $1.8 billion, books/movies/music at $1.4 billion, and sports at $1.2 billion.
Free cash flow (FCF) – eBay's net income is translating directly into FCF on a one-to-one basis. For all of 2002, eBay generated reported net income of $249.9 million and FCF of $250.0 million (after deducting tax benefits for the exercise of stock options). On $1.2 billion in 2002 revenue, that's a remarkable FCF margin of 20.6%. For many growing companies, FCF trails net income because operating cash flow has to be reinvested to fuel future growth. In contrast, eBay's lightweight electronic business is capable of spinning off superb FCF, even amidst surging growth. This is a major factor supporting the company's premium valuation.
In terms of valuation, eBay is now trading for a rich 86 times 2002 FCF of $0.85 per share. But let's take a back-of-the-envelope look at what the valuation is on a forward basis:
Looking ahead, eBay is now expecting 2003 revenue of $1.9 billion, off which it might be able to generate $437 million in FCF, which assumes a few extra points of margin through efficiency gains. If stock option dilution adds, say, 5% to shares outstanding based on the Q4 '02 share count, then FCF per share for 2003 might come in at around $1.32. On that estimate -- which is about a nickel higher than the company's own 2003 pro forma EPS estimate -- eBay trades for around 56 times expected 2003 FCF per share.
The moat around eBay's business is about as deep as they come, but 56 times forward FCF is a steep price. While it's no doubt true that premium companies command premium prices, it's hard to see any margin of safety at these levels.