In the latest regulatory filing for Icahn Enterprises on May 15, the prominent activist investor Carl Icahnrevealed he'd greatly increased an existing stock position during the first quarter. The beefed-up position, now a total of 27.8 million shares worth nearly $1.4 billion, currently occupies nearly 5% ofIcahn's $33 billion portfolio.
That's a bold move for Icahn, best known for acquiring large stakes in major companies and then pressing management for changes he believes are in shareholders' best interests.
However, it's uncertain what changes, if any, he plans to push for at this point. After agitating unsuccessfully for months, he seems to have abandoned his ambition of getting eBay (Nasdaq: EBAY) to spin off its best-performing business -- the well-known online money transfer service PayPal. Such a move would be an excellent way for eBay to unlock value for shareholders, Icahn has long argued.
But even with no obvious agenda, it's easy to see why he'd want to load up on eBay, despite recent weakness. (During the past 12 months, the company lost $0.11 a share and its stock fell more than 7%, compared with nearly a 15% gain for the S&P 500.)
Simply put, eBay is becoming an e-commerce giant, already facilitating nearly 10% of the $1 trillion global e-commerce market. And recent setbacks aside, it should be an excellent long-term investment.
Consider, for instance, that revenues have been expanding quickly and steadily overall, rising to nearly $16.1 billion last year from $3.3 billion in 2004 -- a growth rate of nearly 20% a year. The top line is on pace to hit $21 billion in 2015, which translates to a growth rate of more than 14% for this year and next.
PayPal, arguably the gold standard for online payments, contributes more than 40% of eBay's total revenue and could be responsible for 50% in a year or two. So I don't blame management for resisting Icahn's proposal to spin it off.
In the end, I think management is right that a spin-off would destroy shareholder value by eliminating PayPal's synergy with eBay's overall operations in terms of attracting customers, gathering useful customer data, and facilitating solid growth.
With things as they are, PayPal's user base has already ballooned to 148 million active accounts and 25% annual growth in payment volume. Along with increasing availability through mobile devices (which now generate $27 billion of PayPal's $180 billion in annual payment volume), a close connection to eBay's online marketplace should help maintain this momentum.
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| EBay is becoming an e-commerce giant, already facilitating nearly 10% of the $1 trillion global e-commerce market. |
Consumer interest in the original auction service has been flagging for years, so eBay has been shifting more toward a straight fixed-price platform accommodating many types of vendors. At this point, the auction business generates only about 20% of revenue, compared with about a third from fixed-price operations.
Recently, the latter segment has shown particularly strong growth in a variety of retail categories. In coming years, payment volumes should grow around 13% annually in the fixed-price segment but remain relatively flat on the auction side, analysts project.
EBay already has a considerable international presence, with more than half of revenue coming from foreign sources and online marketplaces operating in 22 countries in North America, Asia, and Europe. International growth opportunities still abound, though, since more than half the world's Internet users are in developing markets.
One the main strategies for extending eBay's global footprint will be to focus on the largest emerging markets -- Brazil, Russia, India and China, the so-called BRIC nations -- where management set the lofty goal of quadrupling sales between the beginning of 2013 and the end of 2015. By then, as many as 25% of active eBay users could be in emerging markets, and these countries should account for at least 12% of global revenue, management estimates.
Keeping with the international theme, I applaud management's gutsy decision recently to pay $3 billion in foreign taxes so it can repatriate $6 billion in cash. Many U.S. companies have opted against similar moves even though it prevents them from accessing many billions in cash that's just sitting in foreign banks. But because eBay is willing to take a big tax hit now, it will have that much more capital to put toward things that benefit shareholders like international expansion, acquisitions, share repurchases, and investments in mobile and other technologies.
There's also the issue of the massive data breach discovered earlier this month in which hackers accessed 145 million eBay accounts. As with the recent hacking episode affecting Target (NYSE: TGT), eBay could see its stock slump if the breach is found to be worse than currently thought -- that is, if eBay learns the hackers were able to decrypt passwords or access financial data.
If that occurs, eBay could lose the trust of its customers and its performance could suffer for an extended period. At this point, though, it appears only less sensitive information (such as usernames, birthdates, telephone numbers and email addresses) was compromised.
Risks to Consider: E-commerce changes rapidly, and eBay faces intense competition. Failure to evolve quickly enough could seriously impair profitability.
Action to Take --> Don't worry about eBay's recent losses. The firm should quickly return to profitability, with projected earnings per share (EPS) of $2.74 for all of 2014. At the projected 12% growth rate, EPS could reach $4.83 by the end of 2019. This implies upside on the order of 77% during that time, assuming an earnings multiple in the historical range of 19.
Icahn followers should consider following their guru's lead and investing in eBay. Despite stumbling recently, the company remains a global e-commerce leader with attractive growth potential. What's more, it offers a certain amount of safety for shareholders in that its stock is typically 12% less volatile than the overall market.
