The Skype's the Limit

by: eBay Investor October 26, 2008 | about stocks: EBAY    

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eBay's (EBAY) acquisition of Skype in 2005 has been one of the many controversial moves eBay has been recently making. The purchase was originally marketed as the missing piece to create the holy trinity in eBay's hallowed e-commerce halls (along with eBay's auction sites and PayPal.) The thinking was that Skype would accelerate transactions among strangers as they communicated to each other more efficiently. eBay later found out that people are more interested in buying/selling quickly then chatting it up about those transactions.

Consequently, Skype did not live up to all the hype, and eBay has been paying for the acquisition ever since. So the question remains, eBay goofed – but how bad? How bad is Skype? I think if you look at their performance; you'll find surprisingly that Skype is not bad at all…

What did eBay pay for Skype?

First things first, how much did eBay exactly pay for Skype? I've noticed a lot of numbers floating around the web anywhere between 2.6 to 4.1 Billion. The variance stems from the tiered payment structure that was negotiated to be based on Skype's future performance. EBay had agreed to initially acquire Skype for $1.3 billion in cash and $1.3 billion in stock and would pay up to $1.5 billion more if Skype met financial targets by 2008 and 2009. eBay ended up paying 530 million out of the 1.5 billion performance portion to settle the transaction. So the grand total paid was 3.13 Billion dollars. If that wasn't complicated enough, eBay at the same time took a 900 Million dollar charge basically valuing Skype at 2.23 B (out of the 3.13 B they paid).

How is Skype doing anyway?

So investors agree eBay overpaid and eBay agrees with them. So, just how bad is Skype? Well, let me breakdown revenue numbers and current growth rates and you be judge. Revenue in the past 4 quarters came in at 521 million vs. 332 million for the previous 4 quarters giving us a growth rate of 56.9 % Y/Y, a growth rate that currently eclipses Amazon (AMZN), Yahoo (YHOO) and yes…even Google (GOOG).

But what good is growth if that growth is drastically slowing down?  Amazingly, growth is not slowing down – in fact it's accelerating! Just this week Skype logged its fastest growth rate of user activity in its history – Skype logged an additional one million more concurrent users (a good measure of usage) in just 35 days.

So here we are; we have a company growing 50+ percent year over year, is currently accelerating growth and most importantly profitable. It sounds to me like we got the bases loaded for investors.

Skype had Q3 2008 revenue of $143 million and is on track to reach 2008 revenue of $570 million. Let's be conservative and assume the current economic crisis hits revenue growth and causes it decelerate almost half to 30% next year, we can still expect somewhere around $741 million in 2009 revenue.

Skype's operating margin (excluding options) is expected to come closer to 16% in 2009. This would yield 2009 pro-forma operating income of $119 million and tax-adjusted pro-forma earnings of approximately $107 million. Again, just being very conservative and a forward P/E multiple of 30x (again restricting PEG to 1.0x) we get a current valuation of roughly $3.2 billion. 3.2 Billion Is more than the 3.13 Billion dollars that eBay paid and definitely more then what eBay has valued Skype at 2.23 B

Sometimes it's okay to be a third wheel.

I understand Skype does not have any of the promised synergies with eBay. As a standalone company however – it would definitely be valued much more then the unloved step child it is now. Skype should be a net positive toward eBay, and at worse, have a neutral effect on investor sentiment. Being a third wheel can be okay as long as that wheel is carrying its own weight…say, like on a tricycle.

Disclosure: Long EBAY

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This article has 29 comments:

  •  
    Oct 26 07:24 AM
    Skype may be "a third wheel" "carrying its own weight…say, like on a tricycle"
    but eBay is the main wheel, the big one up front with the pedals, and that one is wobbly due to the idiot controlling the pedals and steering it,
    John Donahoe.
    And as we know, he never looks back to see where eBay has been,
    he just stares ahead for a ditch to crash eBay into..... repeatedly!
    Reply | Link to Comment
  •  
    Oct 26 10:59 AM
    he stares ahead for a ditch to crash eBay into . . .

    about the size of the Grand Canyon, lol.

    Reply | Link to Comment
  •  
    Oct 26 03:32 PM
    This is what happens when a company has so much money in, spite of their poor management - they want to run out and buy every shiny little thing that catches their eye. Add to Skype the china syndrome - where they threw millions into china and gave them free listing fees...all paid for on the backs of all the other sellers who are gouged fees! .....and they want to put Whitman in as secretary of the treasure???? What a big fat joke! Or let her run for governor of california ....yet another big fat joke!
    Reply | Link to Comment
  •  
    Oct 26 03:55 PM
    eBay and Skype do have a few things in common. Extremely poor management, for one. Abysmal customer service, for another.
    Reply | Link to Comment
  •  
    Oct 26 08:32 PM
    completely agree. skype is as big an opportunity out there as anything today. the problem is not what the possibilities are for this business model - it's the execution on those opportunities. skype could have won what apple is going to win with the app store. but now it's probably too late for skype to win that game. and if they don't watch out, Apple will continue to take away the opportunities one by one. but if they right the ship, and start executing on even just a few of the really big opportunities that are still untapped, it will be worth quite a bit more than they paid for it. but if ends up just being a service where they generate revenue from phone calls, it may still be successful, but it won't be anywhere close to what it could be.
    Reply | Link to Comment
  •  
    Oct 26 09:07 PM
    Dinah Balk here again? Your hate runs deep for eBay. What could they have possibly done to you? Gave you a place to sell, but now charge to much? Why such deep seeded hate? Why not move on, you don't want eBay and they don't want you? What's the purpose of your bashing?

    I just got a great deal on a laptop on eBay for my Dad, check everywhere for the best deal I could find including Amazon, but found what I wanted on eBay. Just received it and could not be happier with it, I'm customizing it for him now.

    I love Skype, I have Pro account with a Skype-In # and VM use it as my land line at home with a PC-less Skype phone. A great deal, can call all I want for one flat rate for the year. I call long distance to family on the east coast, my calls her family abroad, quality is excellent. Skype will only benefit with the economy in the shape it's in. I thing eBay will resist pressure to sell Skype, they know they have a diamond in the rough.
    Reply | Link to Comment
  •  
    Oct 27 12:52 AM
    The few ebay cheerleaders left have so much hope, it's a real shame they have to be disappointed in ebay's core crumbling down to the lowest of low stock prices it's ever seen in 7 years. I expect that so many folks have lost at least 1/2 of their initial investment, and some even more than that. What a shame! And to think the stock will tank even further is almost painful just to think about, these days. And the CEO's can't even figure out what to do about it. Instead they continue to make impulsive un-thought-out decisions that continue to cover up the bad decisions they have already made too quickly. What a shame! Ebay used to be a booming growing company, made up of the most diligent and hard working sellers. Most are packing their bags and leaving. They can't really benefit from Skype anyway, it never took hold on the site itself. Paypal was a lucky fluke for ebay. They have no business investing in anything BUT their failing and crumbling core.The recent loan to purchase yet another loser company was yet another big blunder..but these poor decisions continue until someone with vision is able to put a stop to this madness and rid the site of the poorest management anyone has ever seen in recent days.

    Noteably, the collectibles, antiques and vintage items sellers have been busy on Etsy's new vintage venue that they have offered to the ebay immigrants who have just arrived, ready to go to work selling again...the site is just recently booming with attention and page visits, as can be seen in this site comparison chart. siteanalytics.compete....

    It does not appear to be hurting Etsy's site that the economy is weak right now. Lots of items being listed and lots of seller support there! Very Impressive! Go Etsy!
    Reply | Link to Comment
  •  
    Oct 27 01:45 AM
    Re Ebay+++'s comment: Well 3 hurrahs for you. So you bought a laptop on Ebay and think Ebay is the best thing since hot chocolate with marshmallows. Try making a living selling there as so many people were doing..and now have left because they no longer can sell much of anything or make any profit due to Ebay's newest CEO loser Donahoe who implemented changes directed at sellers which guaranteed them to fail. Whoever hired him is to blame here. Is Ebay waiting for the company to completely self-destruct before they figure out maybe they should get rid of him..???? The upper level management doesn't appear to be too bright either..!!

    Oh well, it's too late now anyway. I was a 10+ year Ebayer, had fun buying and selling on Ebay over the years, then this loser came on board and started making all of these hideously insane changes. I bought ebay stock when it first went on the stock exchange, sold some at a profit, bought and sold more over the years. I saw where Ebay was headed months ago and sold my remaining shares when I still had a profit. Best decision I made this year.

    As for Ebay.. I'll be happy to see its continued and fatal demise.
    Reply | Link to Comment
  •  
    Oct 27 09:39 AM
    Consequently, Skype did not live up to all the hype, and eBay has been paying for the acquisition ever since.

    WRONG!!! We the sellers have been paying for this blunder ever since! I felt this statement needed to be corrected.

    Oh, and thanks ebay+++,

    Your checks is waiting for you at the front desk.

    -Love John
    Reply | Link to Comment
  •  
    Oct 27 04:46 PM
    If you don't like eBay don't sell or buy on it. But why bash? Why not move on?

    As the article states Skype is just fine, so how are eBay Sellers paying for it? Fail to understand that.

    My understanding of the changes were that they gave an advantage to "Good" sellers and made it a disadvantage to "Bad" sellers. What's wrong with that, besides the fact it pisses off the "Bad" ones? If your one of the "Bad" sellers, find another place to sell, don't blame eBay for your faults. eBay is looking out for itself, how is that bad? I don't think eBay is crumbling either, I've heard that for 2 years now, sure the Stock price sucks right now, but this is a powerfully strong company. I mean they only made 500 million in Q3. Paypal and Skype are growing in leaps and bounds. They also dominate Classifieds outside of the US, and own 25% of Craigslist for in the US.

    Bash a hard as you want but this company is not about to topple, that just wishful thinking from bitter "Bad" sellers. I actually think the continued bashing just shows that there is nothing quite like eBay anywhere else. Why else would you respond so passionately to eBay news? Can't wait to hear the answers ;)
    Reply | Link to Comment
  •  
    Oct 27 08:15 PM
    eBay+++
    It's a GOOD eBay seller for many years, then got kicked in the gut by Donahoe thing.......you wouldn't understand.
    eBay stock went public in 1998 at $18 per share, 10 years later it's $15 a share.
    I fail to see your optimism for the future of eBay, and I sure as hell don't understand your antagonizing tone towards people that have actually sold on eBay for many years.
    Do you really think that "bad sellers" would give a hang, one way or the other?
    Donahoe opened the door much wider for "bad buyers".... it's that simple.
    Sorry if you've lost money on eBay stock, but you are a tiny voice trying to prop it back up.
    Reply | Link to Comment
  •  
    Oct 27 08:44 PM
    If you own stock in any company right now your hurting. Unlike you Bob I'm not foolish enough to think my comments can prop eBay up or down.

    But I like eBay, buy stuff off the site and use Skype, happy with both. Bottom line.
    Reply | Link to Comment
  •  
    Oct 27 08:46 PM
    PS: Before eBay+++ jumps me about the share price, the stock has split 4 times over the years, but the shares were about $40 one year ago, with no splits during this time period.
    Reply | Link to Comment
  •  
    Oct 27 09:00 PM
    eBay+++ You can call me foolish if you like, but many of us hold out hope that things will be turned around, so that the field is level again.
    Let's call it a grass-roots effort ;)
    I bought as much as I sold, over my 11 years of membership, so I know both sides of the issues.
    I do own stocks, not eBay, and yes I'm hurting too!
    Reply | Link to Comment
  •  
    Oct 27 10:51 PM
    Bob C, Why argue or try to convince Ebay+++ of anything.. This person is living on fantasy island on another planet and doesn't have a clue about what's going on in the real world of ebay. Don't waste your time..!!!!
    Reply | Link to Comment
  •  
    Oct 28 01:04 AM
    Just bought a Flip Video Camera on eBay. $92 on eBay. $125 on Amazon. eBay is where the value buying is. And in this economy, any site which has value will win. Bashing is just childish. If you like it, stick around. Otherwise move on.
    Reply | Link to Comment
  •  
    Oct 28 01:39 AM
    ebayrocks

    Another one-time-posting wonder pops up. It's a rock, all right. And rocks sink.

    "Buying" means nothing, dude. You're not gettin' it!
    Reply | Link to Comment
  •  
    Oct 28 10:05 AM
    Brute..

    Buying(and value) is everything. Anyone who focuses on that will win at the end of the day. Note that the customer in a commerce transaction is the buyer. And customer is always right.

    Bashing is just childish. If you dont like it.. move on. Its a big world out there. Do something constructive.


    Reply | Link to Comment
  •  
    Oct 28 10:46 AM
    to eBayrocks:
    I decided to have a little fun and googled "ebay rocks" and found 13,400 hits.
    Then tried "eBay sucks" and found 27,500 hits.
    Interpretation is up to you.
    Bashing the bashers is just childish, and not constructive.
    Try selling on eBay, then give us a report on how great it is doing.
    Reply | Link to Comment
  •  
    Oct 28 03:00 PM
    Fyi to ebayrocks:

    I was a Powerseller on ebay with 100% feedback. I left. It was my own choice and carefully thought out over a period of time.

    I decided I did not wish to continue supporting such a greedy, devious entity as ebay that is so completely lacking in integrity and character.

    I sell elsewhere and do so with much less stress, where there is constancy and character and real customer service. Where if a problem arises with a seller I have a fair shake with winning.

    I speak, by the way, of more than one site.

    ebay opened a Pandora's box when they rattled it so hard. Between Google, Youtube, and MySpace, among so many others, there is now vast opportunities for selling elsewhere. And buying.

    It's a Pandora's box they'll never be able to close successfully, no matter how hard they squeak.
    Reply | Link to Comment
  •  
    Oct 28 03:01 PM
    Make that buyer, LOL. I'm the seller!
    Reply | Link to Comment
  •  
    Oct 28 08:06 PM
    Et tu Brute, If you have moved on why are you posting here? Don't like eBay, don't sell or buy on eBay. This article was about Skype, yet you could not resist taking some pot shots, why? I think eBay will be fine, with Paypal and Skype they'll be great. Like flies on shit you old Sellers can not resist anything to do about eBay.
    Reply | Link to Comment
  •  
    Oct 29 10:19 AM
    to ebay+++
    This thread is dead.
    eBay bashers are waiting for the next eBay related blog to bash.
    See you there!
    Best regards,
    one of the flies
    Reply | Link to Comment
  •  
    Oct 29 10:30 AM
    PS: The market is up again this morning, but eBay has a red arrow pointing down.
    But as you said:
    "I think eBay will be fine, with Paypal and Skype they'll be great"
    Reply | Link to Comment
  •  
    Oct 29 11:54 AM
    I'd like to see how much money ebay is wasting by paying ebay+++ and ebayrocks to post false positive transaction comments here. I am calling you liars out!! Please prove me wrong - you both claim to have 'just bought' fantastic bargain items on the bay, list the item ID#s so we can look at completed items and verify your claims by product and sale price. I can only assume that was within the past 30 days, otherwise you would have not 'just' bought them, and if they were more than 30 days ago, then it would not reflect the current state of the bay's failed status. Please, give us proof of your fantastic dealings - otherwise SHUT UP. We ex-sellers know the truth about where ebay is heading much more so than paid-for cheerleaders.
    Reply | Link to Comment
  •  
    Oct 29 03:03 PM
    Yeah that would be real smart, giving our your eBay ID and related transactions. User 288096 you take the cake for pure stupidity.

    At least Bob C is rational.
    Reply | Link to Comment
  •  
    Oct 30 04:36 PM
    I didn't say give me your ebay ID ans password, I said show me the itemID#, you know, that string of numbers that represents the auction you're claiming you won? I just want to prove that you are both liars, that's all... pony up!
    Reply | Link to Comment
  •  
    Oct 31 04:50 PM
    Meg's Skype mistake:
    With Ebay's share price in bargain basement area.,Im a little surprised the new ceo isnt doing everything he can to buy back shares.(buy it now)Their conference calls are entertaining,almost funny.
    Why not sell Skype and put the money to work in the open mkt and support the share price?They could even auction it!
    Reply | Link to Comment
  •  
    Dec 02 09:04 AM
    Who cares if Skype doesn't synergize with ebay. Skype rocks and is an amazing product that will one day put traditional phone companies, voip comapnies and video conferencing companies all out of business
    Reply | Link to Comment
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