Why eBay Is Tumbling: What's Wall Street Saying

NEW YORK (TheStreet) - EBay (EBAY) made noise with its first-quarter earnings report last night by announcing that it planned to repatriate approximately $6 billion in net foreign earnings, creating a $3 billion non-cash charge taken in the first quarter.

EBay said that the money could be used to help the San Jose, Calif.-based company's "financial flexibility," as it looks to invest in its business, particularly PayPal or possible acquisitions. That said, the company stopped short of saying that a deal was imminent.


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"Just to be clear: we are not announcing any large U.S. based acquisition," eBay CFO Robert Swan said in an earnings call with analysts after first quarter results were released.

EBay reported a non-GAAP profit of 70 cents a share on revenue of $4.3 billion, beating core earnings forecasts. GAAP earnings were clouded by what eBay characterized as a "discrete tax charge" of about $3 billion on the repatriation of $6 billion in foreign profits. On a GAAP basis, the company lost $1.82 a share for the quarter.

The company guided Wall Street below expectations for the second quarter, saying revenue was expected to be $4.325-to-$4.425 billion and GAAP EPS between 51 cents and 53 cents a share. For the full-year, eBay now forecasts between $18 billion to $18.5 billion in revenue and $2.95-to-$3 in non-GAAP EPS.

EBay has been involved in a very public proxy fight with billionaire activist investor Carl Icahn who wanted the company to either spin off or sell its payments subsidiary, PayPal. However, eBay held firm, announcing an agreement with Icahn on April 10 in which the company would keep PayPal for now but nominate an independent director to its board. The company agreed to Icahn's suggestion to appoint David Dorman, founding partner of Centerview Capital Technology and the former chairman at Motorola.

Shares were tumbling 5.4% to $51.58 on Wednesday. Here's what Wall Street analysts were saying following earnings.

Brian Pitz, Jefferies (Buy; lowered price target by $6 to $60)

eBay reported a Beat quarter on double-digit user growth and solid showing from PayPal. Marketplaces disappointed with 10% Y/Y growth (vs. 12% for US eCommerce) as the core biz and StubHub faced headwinds from the likes of Ticketmaster. Guidance came in slightly below cons as mgmt continues investing in the business. eBay also announced plans to repatriate ~$6.0B (net of ~$3.0B in taxes) in foreign earnings.

Heath Terry, Goldman Sachs (Buy; $64 PT)

eBay reported 1Q revenues of $4.26bn (+13.7% yoy vs. +13.5% in 4Q) and non-GAAP EPS of $0.70 vs. consensus at $4.23bn and $0.67, respectively. Organic revenue growth of 13% was even with 4Q, while active user growth of 14% at Marketplaces and 16% at PayPal were also in line with 4Q. eBay repurchased $1.8bn worth of shares and took a GAAP (non-cash) charge of $3bn to facilitate the eventual repatriation of $9bn in offshore cash, if/when it so chooses, to help facilitate the $3.8bn in remaining repurchase authorization and potential, but unplanned M&A. While investments in marketing at PayPal and improvements in the Enterprise business could drive incremental growth, fee changes at StubHub will impact Marketplace revenue through 2014. With signs of growth acceleration, ~$4bn share repurchase in process, with room for more, and shares at 13x 2015 adjusted EPS estimates, we expect eBay to outperform its peers.

Robert Peck, SunTrust Robinson Humphrey (Buy; lowered price target by $3 to $62)

EBAY announced it may repatriate $9B of overseas cash, which would trigger $3B in taxes and thus add $6B of net cash to the U.S. balance sheet. The company took the $3B tax charge in 1Q (accounting, no cash impact) but has not repatriated any cash yet and may never do so. Should the company repatriate, we believe the reasons would be: 1) to fund/expand US operations (PayPal) as we estimate ~80% of FCF is generated overseas, 2) to execute the $3.8B remaining in the buyback, and 3) to maintain flexibility for acquisitions, though nothing is imminent. With $4.1B of debt outstanding versus ~$6B of EBITDA, we believe debt is a viable alternative. Ebay generated $1.0B FCF in 1Q, repurchased $1.8B in stock, and ended the quarter with $11.9B in cash, $2.2B is in the U.S.

Stephen Shin, Morgan Stanley (Equal-weight; N/A PT)

ebay reported modest upside but guided Q2 below consensus as sluggish Marketplace growth and higher spending continue to overshadow PayPal performance. The deceleration in US GMV growth and higher spending leaves little upside to 2014 numbers. We lower our base case to $55 from $56. ... Q2 EPS guidance falls short of expectations from continued soft marketplace trends and increased spending in our view. ebay maintained FY guidance, implying revenue headwinds from StubHub will likely dissipate. However, the marketplace slowdown diminishes the chance of revenue upside, and higher investment in 2H will weigh on EPS.

Justin Post, Bank of America Merrill Lynch (Buy; lowered PO by $3 to $65)

Bulls will highlight PayPal strength, fixed price growth, attractive SOP valuation and easing comps while bears will highlight U.S. Marketplace headwinds, low Intl GMV growth, increasing competition, lack of product innovation, and a higher '15 P/E multiple vs. EPS growth. We still see eBay as a solid play on secular eCommerce strength with 19% fixed price GMV and 32% Merchant Services TPV growth, and still prefer lower multiple stocks (16x 2015 EPS) in a difficult market environment.

--Written by Laurie Kulikowski in New York.

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