I’m profiling Ebay in this article more as an update to the friends I invest with.
From 2011 to today, which is about 15 years, Ebay’s total return is about 676%.
That is 14.6% per year.
You might not think that’s a good thing, but I think if I have $1 million of my money and I end up with $7.76 million today, I’ll be pretty happy.
This is what the stock price looks like.
Most of you who are from my generation know Ebay as a platform to bid or auction second-hand items. At one point they owned PayPal, but decided to spin it off.
In the years that followed with so many web 2.0 companies, SAAS companies, Ebay eventually faded into obscurity.
If you’re considering buying information technology companies, you want to buy something with good future prospects.
It’ll be a lot of things, but probably Ebay.
This is what the income looks like:
It seems like today’s sales are lower than 2011’s.
Here’s what net profit or net income looks like:
The total income it earns today is lower than in 2011.
Not only that, but the income is also quite inconsistent: about 4 out of 15 years it is a very low or negative net income.
But what does the free cash flow look like:
While net income is inconsistent, free cash flow is at least positive every year.
Just that the free cash flow is getting lower, but it is still there.
The free cash flow yield in 2011 was 13.9% (FCF / Market capitalization in June 2011).
The free cash flow yield in 2025 was 5.1%.
Ebay only started paying dividends in 2019, starting with a dividend yield of 1.55% and currently has a dividend yield of 1.74%.
So what happens?
Here is the outstanding share change over the past 15 years:
Ebay started reducing their outstanding shares in 2014 and accelerated their share count. They have cut 65% of their shares over the last 15 years.
Each year they spent the following amount to buy back their shares:
They would spend more than their free cash flow on buybacks.
Where did that come from? Of increasing their debts.
Here is their change from net cash to net debt:
Taking on debt to buy back equity feels reckless, but only if you find that withdrawing equity yields a higher return than the interest you pay on debt.
Ebay’s current net debt to assets is 8.1%.
In a sense, they have a lot of room to use debt to buy back more shares if they want.
Even though free cash flow is declining, given the declining shares outstanding, each stock is actually getting more free cash flow.
The current free cash flow yield is 4.47%.
If a company’s outstanding shares decline and earnings per share increase, its market capitalization should still be about the same by default, if there is no contraction or expansion in earnings:
But EBay’s market cap seems higher than where they start.
Ebay is interesting because it has the profile of a company, where the earnings and revenue history tell you you can’t get anywhere with it, yet it turned out to be a compounder of 14.6% per year.
With fairly random results, their stock price shouldn’t be going anywhere in the last fifteen years.
Still, I think it’s his part buying back with its excess cash flow and cash leads to a higher price per share if price gains don’t change much.
Ebay proves a few things:
- Some companies cannot achieve sales and profit growth.
- But they may have decent free cash flow that wasn’t going anywhere.
- And the company existed long enough. As if it has been like this for 15 years.
- Buybacks are a reward for shareholders, just like a dividend. It gives the market a reason to revalue the shares.
- But most importantly, Ebay started cheap with a high free cash flow yield, or buyback yield (the free cash flow plus cash and debt that can be used for buybacks before excessive debt levels are reached)
The difference now is that the yield on free cash flow has fallen quite a bit, so that the current yield on free cash flow that can be used for buybacks is only 4.45%.
I imagine inserting the current free cash flow of $1.75 billion as net income into my buyback model calculator (which you can be reached here), assume 0% income growth, 100% buyback with all their cash flow:
And I want to see how quickly earnings per share and then stock price can rise if the earnings multiple is held constant.
The growth is much smaller, purely because our pace of repurchases is much slower with a repurchase yield of 4.4%.
I’m thinking how many of all SAAS companies can have 15-20 years of free cash flow and survive that long?
If they cannot survive as a listed company for so long, this comparison does not apply.
Ironically, we ask that question to the company that spun it off, PayPal.
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Kyith worked as an IT operations engineer from 2004 to 2019. He currently works as a Senior Solutions Specialist at Fee-only Wealth Advisory Firm Providend. All opinions expressed on Investment Moats are his own and do not represent the views of Providend.
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