Stock of the day: eBay
Nowhere to go but sideways
by Rick Gagliano | December 11, 2006
Once one of the brightest stars in the internet retailing universe, internet auction giant eBay, which for years had a near-monopoly in the auction space, has squandered resources and profits on non-compatible businesses (Skype, $2.6 billion) and expansion into classified ad services and non-vertical markets (Marktplaats.nl - $290 million, Rent.com - $415 Million, Shopping.com - $620 million) in what many see as somewhat vain and misguided attempts to enhance shareholder value.
To date, the only sensible and profitable acquisition was that of online payment processor PayPal, back in 2004, for a bargain-basement $1.5 billion.
PayPal made sense. Ebay's in-house payment-processing service, Billpoint, upon which eBay spent millions developing, could never dent the first-mover advantage PayPal had built up, and was summarily terminated.
Since its arrival as a publicly-held corporation in 1998, the number of outstanding shares has increased 24-fold, diluting the value significantly to a point at which shares purchased after the last 2-for-1 split (February 17, 2005) are still under water. The share price reached a three-year low of 22.86 back in August of this year and has only recovered slightly since.
What's particularly troubling about this company is the way in which it has been run, mostly under the guidance of CEO Margaret Whitman. eBay makes no bones about being only a "venue" instead of an actual retailer, though their heavy-handed rules and regulations would make even the most jaded government regulator gush with envy.
The company routinely adds and changes features and seemingly pays little heed to customer input and the management style may best be typified as whichever way the wind blows. The most recent example of management incompetence is the about-face in "ebay stores" - from a low-cost complementary service to an expensive feature-rich stand-alone which triggered the exodus of thousands of previously happy store owners and the precipitated the resultant dive in share price this past summer.
The company has committed itself to becoming a global brand, and by many measures it is, though operations in the Far East (China, Japan, Australia) and South America have fallen far short of expectations. The major markets remain in Europe, with the UK and Germany their most robust operations.
The profit margin of less than 20% is a cause for concern equal to the bloated p/e ratio (~34). The company revenues are primarily transaction or advertising based, thus, they have no manufacturing or raw material costs, but somehow ebay management has found it necessary to keep more than 11,000 employees worldwide.
--- story continues below ---
With earnings stuck in a rut of around .20-.25 per quarter for an unendurable amount of time, the prospects for share price appreciation seem dependent on downsizing the work force, divestiture of non-performing assets or a combination of both. While revenues have increased at 20-30% year over year, profits are growing at a much slower rate (about 16-17%).
While eBay remains a substantial online destination to buy and sell both new and used merchandise, the stock should not be included in any long or short-term growth portfolios. Most of their revenue comes from PayPal and eBay transaction fees, but management's penchant for inexplicable acquisitions and user-unfriendly fees and features exacerbates the downside risk.