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P0 = P0/S1 x S1, where S stands for sales
1
Behavioral Pitfalls: Judging the Value of eBay
On May 20, 2003 eBay’s P/E ratio was 66.2, while Wal-Mart’s P/E was 22.7.
Analysts are inclined to mistake growth in EPS for growth opportunities
Growth opportunity features ROE > r.
From the time that eBay went public, through June 2004, eBay's ROE < its r of 12%.
eBay appeared to be over twice as expensive as War-Mart.
Analysts were expecting eBay to grow by 42.5%, while they were only expecting Wal-Mart to grow by 14%.
Target Price -- Dec 31, 2003
Present Value eBay FCFs $36,478,759
Less Debt
$79,592
Plus Cash
$2,280,857
eBay's Full Value
$38,680,023
Shares Outstanding ('000) Discount Rate
Differences? EBITDA working
capital investment
Exhibit 2.4
8
Textbook Style Valuation
Year
2002 2003E 2004E 2005E 2006E 2007E 2008E 2009E 2010E 2011E
Earnings ($millions)
Discounting back to mid-2004 would lead to a value of $11,366 (=$12,029/1.120.5) at that time.
9
Mistaking Growth for Growth Opportunities
Mary Meeker titled her April 2003 report on eBay “Tales of a Growth Machine.”
($millions)
Sources of Free Cash Flow Net Income (adjusted for cash flow from other income) Depreciation Interest -Change in Net Working Capital - Change in Short-term Debt -Investment Free Cash Flow
C a p i t a l E x p e n d i t u r e s
4 9 , 7 5 35 7 , 4 2 01 3 8 , 6 7 01 8 8 , 9 0 81 9 0 , 0 0 01 9 0 , 0 0 01 9 0 , 0 0 01 9 0 , 0 0 01 9 0 , 0 0 01 9 0 , 0 0 01 9 0 , 0 0 0
$250 $345 $476 $657 $854 $1,110 $1,423 $1,823 $2,279 $2,849
Growth Rate
38% 38% 38% 30% 30% 28% 28% 25% 25%
Present Value ($millions)
$9,589 $10,740 $12,029 $13,472 $15,089 $16,899 $18,927 $21,199 $23,742
T a x e s
-
-
-
-
- 1 4 0 , 1 6 83 7 0 , 6 4 68 4 9 , 2 0 4 1 , 0 8 8 , 8 4 6 1 , 3 9 4 , 7 8 0 1 , 7 4 3 , 7 1 1
C h a n g e i n W o r k i n g C a p i t a l ( 4 7 , 5 8 2 )( 4 1 , 0 9 1 ) 3 9 , 2 3 2( 2 6 , 7 9 2 ) 6 , 8 4 9( 5 8 , 6 9 5 ) 9 , 7 0 9( 5 2 , 0 9 6 ) 7 , 3 7 5( 5 3 , 2 7 8 ) 4 , 1 0 5
She then applied the perpetuity formula
PV = $3,266,096 / (0.12-0.07) = $65,321,907
6
Biases
Discount rate, 12%, fair expected return. Target price of $106 implies expected
2.2 0.3 21.9 -122.0 -97.6
Note: Meeker uses EBITDA of $229.4 in her report, which is very close to the income statement item "Operating Income Before Depreciation." The sum of the first three items in the column above that displays Meeker's figures sum to $229.4. Her report provides tha aggregate figure, but not the decomposition.
330,259 12%
Future Growth Rate
7%
DCF Per Share Value
$117
Exhibit 2.3
Meeker forecasted that free cash flows in 2011 will be $3,266,096 = 1.07 x $3,052,426.
GMS Target Target
Salesper Price
Price
Share Dec2004(Discounted)
$90
$84
$72
$68
$103.88 $156
$147
Exhibit 2.2
5
Free Cash Flow Computation
( $ T h o u s a n d s )
return exceeds 12%. PEG and P/E target prices imply returns
below 12%, even negative. FCF and price-to-sales target prices
imply returns above 12%.
7
Biased Free Cash Flows
came to dominate the retail sector, webbased counterparts would emerge and dominate Internet commerce.
Mary Meeker described the phenomenon as the “Wal-Marting of the Web.”
eBay's Statement Mary Meeker's
of Cash Flows
Report
206.6 86.6 2.2 -363.2 -29.8 -97.6
140.6 86.6 2.2 -41.1 -57.4 130.9
Uses of Free Cash Flow Interest Dividends -Change in Long-term Debt - Change in Short-term Debt -Stock Issue - Other Financing Free Cash Flow
F r e e C a s h F l o w
( 1 3 , 2 6 3 )1 3 0 , 9 2 73 4 5 , 1 7 65 0 8 , 0 3 58 2 2 , 1 2 5 1 , 0 1 2 , 8 1 9 1 , 3 0 2 , 2 9 2 1 , 3 3 4 , 9 9 7 1 , 8 3 9 , 5 1 9 2 , 3 4 7 , 0 2 7 3 , 0 5 2 , 4 2 6 6 5 , 3 2 1 , 9 0 7
Base
$84 $68 $147 $117
$104 $106
Exhibit 2.1
4
Methodology
Year
EPSat32%growth EPSat38%growth GMS/shareat38%growth P/E
2002
$0.86 $0.86 $39.53 103
2003E
$1.14 $1.19 $54.55
Chapter 2
VALUATION Behavioral Corporate Finance
by Hersh Shefrin
McGraw-Hill/Irwin
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved.
Exhibit 2.5
$23,742 = E2011/r = $2,849/0.12 Because eBay pays no dividends before 2010, the $23,742 would
