Solid Start, Back-Half Tailwinds Support View on Ebay
We expect to increase our fair value estimate of the firm, but prefer a wider margin of safety before adding to positions.
With the solid start to the year and the back-half tailwinds, we're buying more into eBay's 2017 outlook. We've plan to adjust our model to the high end of its organic revenue growth guidance of 6%-8% (implying $9.3 billion-$9.5 billion), just above the midpoint of its operating margin (29%-31%) and adjusted EPS forecasts ($1.98-$2.03) due to technology investments, brand marketing, and promotional activity. Over the next five years, we assume average annual revenue growth of 4% and operating margins of 32%, though site enhancements coupled with traditional retailers looking for greater online distribution and new international opportunities (including the Flipkart partnership in India) could set the stage for upside.
Based on greater near-term optimism and tax reform adjustments, we're planning to add a few dollars to our $30 fair value estimate. While we find eBay to be an attractive capital-allocation story, we'd prefer a wider margin of safety before adding to positions.
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