Sub-Head: Wall Street Misses Forest for Trees
A typical eBay quarter: solid numbers, sandbagged guidance, unavoidable deceleration leading to gradual multiple compression, marketplace and payment businesses that are changing the world. And then there’s that new business, Skype, the acquisition that made everyone think Whitman & Co. had finally gone nuts.
I still think the wrong company bought Skype–in my opinion, Yahoo! should have ponied up, and, because it didn’t, now runs the risk of being as much a force in VOIP as it is in auctions. This said, it’s time to forget about lost opportunities and jerry-rigged “synergy” stories and focus on the fact that, as a stand-alone business, Skype is kicking ass.
Since September, average concurrent users have doubled, from 3 million to 6 million. Average daily sign-ups have increased to 220,000 per day (closing in on 2 million a week–2 million a week!). The company is rapidly rolling out new products, getting closer to the point where using it will become not only less expensive but more convenient (Skype is now my primary business phone number; a real back-end business voicemail system, I hope, won’t be too many quarters away). Revenue–yes, revenue–grew more than 40% sequentially, from $25 million to $35 million.
Assuming a reasonable rate of deceleration (which isn’t a given), Skype could do close to $200 million in revenue this year and $500 million next. $500 million is meaningful, even in this league. And assuming, say, $150 million of that revenue drops to the bottom line, eBay would have picked up the company for 15x-30x earnings–not a fire sale, but still a bargain. And remember that we’re not talking about some niche market here. We’re talking about the global market for voice. If Skype’s Google- and eBay-like growth trajectory held, $150 million of profit would be only the beginning.
So, while the Street obsesses about the horror of a minor interface goof (a switchover from auctions to stores, which apparently temporarily whacked revenue), and forgets that, thanks to the re-sandbagged guidance, expectations for the rest of the year are now so low that the company could fall over them, think about this: eBay is now ideally positioned to benefit from decades-long generational trends in not just two massive global markets (retailing and payments) but a third (voice). Could they screw this up? Of course. But for about 30x free cash flow, this risk would seem to be priced in.
Reminder: I own a small chunk of eBay (which, despite my anti-trading philosophy, I am thinking of increasing), and this isn’t investment advice.