Shares of e-commerce platform eBay Inc EBAY were trading higher Wednesday after activist investors took stakes in the company, with one outlining a strategy that includes spinning off non-core businesses.
Analysts said the news that Elliott Management Corp. and Starboard Value had each taken a roughly 4-percent stake in eBay — and that Elliott was demanding change — are a positive for the stock, as it pressures management to cut costs and consider spin-offs.
What Happened
Paul Singer’s Elliott Management announced Tuesday it had taken a $1.4-billion stake in eBay and sent a letter to its board outlining ideas for how eBay “can become a better and more valuable company.”
Media outlets reported that another activist investor, Starboard Value, has also taken about a 4-percent interest in eBay.
Why It's Important
In its letter, Elliott said refocusing on eBay’s core marketplace and making operational improvements could speed up growth and significantly improve the value of the stock, which it said has badly underperformed, causing investors to lose confidence.
“Substantial and immediate change is required,” the letter said.
In addition to the online marketplace business that most consumers associate with eBay, the company also owns eBay Classifieds Group and ticket seller StubHub.
“These are both premier, strategic assets, and we believe that substantial value can be created by separating them from the core marketplace,” Elliott Management said in the letter. “As a more focused and efficiently run business, we believe eBay can achieve a value of $55 to $63-plus per share by the end of 2020, representing upside of more than 75-100 percent within the next two years.”
Analysts React
The interest from the new investors is a positive for the stock, Bank of America Merrill Lynch analyst Justin Post said in a Wednesday note.
BofA reiterated a Neutral rating on eBay and lifted its price target from $34 to $38.
“We agree with the spirit of the analysis in the sense that there is additional value in a sum-of-the-parts scenario, and the implied core eBay marketplace is low," the analyst said.
Post said he agreed with Elliott that margin trends have been disappointing and that cost-cutting opportunities exist.
What the letter didn’t have an answer for was low sales growth and the ongoing loss of market share to competitors Amazon.com, Inc. AMZN and Walmart Inc WMT.
“We think the biggest issue for the stock is the concern that U.S. (gross merchandise volume) growth could turn negative,” the analyst said.
KeyBanc Sticks With Bullish Stance
KeyBanc Capital Markets agrees with Elliott’s analysis and that activist investors could spur urgency at eBay, analyst Edward Yruma said in a Tuesday note.
KeyBanc reiterated an Overweight on eBay with a $43 price target.
“Management has been working aggressively to pivot the core marketplace business to become a destination of deals, rather than strictly an online swap meet,” Yruma said. “Fundamental to this pivot is an improved user experience (product-based landing pages, intermediated payments, among others).”
Yruma said eBay could attractive to a buyer.
“We believe that the core marketplace business could have significant strategic value to a U.S.-focused e-commerce player looking to gain scale."
Walmart is one example of a player in search of an e-commerce business, the analyst said.
Related Links:
Aegis Lowers eBay Revenue Estimate On European Economic Softness, Strong Dollar
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