The news first hit the internet on February 4. The Wall Street Journal reported that Intercontinental Exchange (NYSE:ICE), the owners of the New York Stock Exchange, had made an offer of more than $30 billion for eBay (NASDAQ:EBAY). EBAY stock jumped by more than 8%.
For eBay shareholders, it was good while it lasted.
ICE Threw Cold Water on eBay Stock
Two days later, ICE CEO Jeff Sprecher announced that the company had broken off talks with eBay. As I write this, eBay is down almost 7% in pre-market trading Feb. 7, 2020. That downward trend is likely to carry into Friday’s trading.
When I first saw the news fly across my screen that ICE was making a play for eBay, much like the news Kobe Bryant had died, it took me a few seconds to process.
Why on god’s green earth would the owner of the NYSE want to buy a company that helps people sell stuff? Many of ICE’s investors felt the same way, voicing their concerns to Sprecher directly.
“Based on investor conversations following today’s ICE earnings call, ICE has decided to cease exploring strategic opportunities with EBay,” the exchange said in a statement.
From ICE’s perspective, its obvious how the attributes of its business of running marketplaces on a large scale could be helpful to big companies looking to reinvigorate their operations or small ones trying to scale up.
Sometimes, the unconventional works; this time, it didn’t. If you own ICE stock, I wouldn’t be concerned about its outside-the-box play for eBay. It shows how management is always considering ways to make ICE better while delivering value to shareholders; that’s gold.
But as for eBay, it demonstrates how rudderless the company is at the moment.
If you own eBay stock, you better hope that some other buyer comes along in the not-too-distant future that is a more conventional fit because there appears few if any catalysts to it higher.
Signs eBay is Faltering
CNBC reported February 5 that eBay had ended its employee shuttle service for commuters in the San Francisco Bay Area. That comes after laying off 102 employees in San Francisco and Seattle.
The company says not enough people were using the service, but it appears the real reason was to satisfy activist investors Elliott Management and Starboard Value.
According to Bloomberg, Starboard is pushing the company to jettison its classifieds business while also setting loftier expectations for itself, including doing more with less. Hence, the cuts mentioned above.
“In order to achieve the optimal outcome, we believe classifieds must be separated, and a more comprehensive and aggressive operating plan must be put in place to drive profitable growth in the core marketplace business,” Peter Feld, the head of research for Starboard Value, stated in a letter to the company.
Just as it had no interest in selling out to ICE, eBay appears to have little desire to meet the demands of the activists. At least not to the extent Starboard would like.
Frankly, even though I believe that eBay is not a stock worth owning given its lack of direction, I find it amazing that these two investors — Starboard own a little more than 1% and Elliott owns 1.4% — who combined have less than half the ownership stake of founder Pierre Omidyar, dare to push their weight around like they own the place.
They might have a lot of good points to make, but activism of this kind illustrates how the deck is stacked in favor of the 1%.
But, I digress.
Competition is Hurting Business
eBay continues to fall behind its eCommerce rivals and the addition of sales taxes is only going to make its recovery that much more difficult.
As the Financial Times reported in late January, a total of 33 states, including three biggies: California, Texas and New York, have already implemented internet sales taxes and more are expected to follow.
“This rollout happened faster than anticipated and affected small businesses and consumer sellers requiring marketplaces to collect and remit on their behalf,” said Scott Schenkel, eBay’s interim chief executive.
eBay believes a national internet sales tax makes sense to reduce the burden on small businesses.
The reality is that eBay’s revenue grew by just 2% in 2019, excluding currency, a figure that hardly instills fear at Amazon (NASDAQ:AMZN) headquarters. Shareholders can be thankful that it still managed to pull in $2.4 billion in non-GAAP profits from its ongoing operations.
So, even though it’s broken, the lights aren’t about to go out in San Jose.
The Bottom Line on EBAY Stock
In fiscal 2019, eBay had $2.6 billion in free cash flow. Based on a current enterprise value of $30.0 billion, it has an FCF yield of 8.7%. Anything above 8%, I consider value territory.
From this perspective, I can see why Starboard and Elliott are interested in eBay stock. It’s a value play for sure.
But as I said in November, I would still rather own its former stablemate, PayPal (NASDAQ:PYPL). Its future is much clearer.
At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
