Monday, November 9, 1998

eBay Inc.
(Nasdaq: EBAY)
Phone: 408-369-4830
Website: www.ebay.com
Price (11/6/98): $84


HOW DID IT DOUBLE?

Going, going, gone! Shares of online auctioneer eBay keep going to the highest bidder, which has meant nothing but good things for those who were willing to take a chance on the upstart's initial public offering (IPO) in September.

At the time, the climate for new offerings was unforgiving. Given the rocky stock market over the latter part of the summer, most companies put their publicly traded future on hold. After an IPO drought that lasted about a month, the company figured, good or bad market, it would do what any of its 1.2 million registered users would do if they had something to sell -- it went ahead and put it on the block.

Priced at $18 a share, the new kid on the block became a prized commodity on opening day, more than doubling on the first trade. However, the shares began to give back those first-day gains, and two weeks later it dipped as low as $25 1/4. That is when the analysts who helped manage eBay's debut sounded the bullish bell. With a price target of $50, followed by another analyst setting the bar at $100 once the $50 mark was reached, the bidding wars turned to the company's prospects.

eBay was a unique entity -- a young Internet community purveyor that had reported consistent profitability. An example of solid fiscal management in the early stages of development, the company has been in the black each and every quarter in 1997, and so far over the first three quarters in 1998. Meager. Scant. Pennies. Yet definite.

With the shares logging on to some serious gains since the early October lows, the gavel has struck kindly towards eBay shareholders. The company many figured was crashing the Internet frenzy bash too late has proven to be the life of the party.

BUSINESS DESCRIPTION

eBay's website claims that more than 28 million items have been successfully auctioned off since inception. Right now there are close to a million items being auctioned in 1,000 different product categories. Registration is free and there are no fees for a customer to bid on or purchase the wide assortment of products for sale. The seller pays a small placement fee of no more than $2 per insertion and then pays eBay a small percentage of any completed sale.

FINANCIAL FACTS

Income Statement
12-month sales: $30.5 million
12-month income: $1.1 million
12-month EPS: $0.03
Profit Margin: 3.6%
Market Cap: $3124.8 million

Balance Sheet
Cash: $74.5 million
Current Assets: $82.1 million
Current Liabilities: $7.3 million
Long-term Debt: $0.1 million

Ratios
Price-to-earnings: 2800
Price-to-sales: 102.5

HOW COULD YOU HAVE FOUND THIS DOUBLE?

I am one of those 1.2 million registered eBay users. I remember stumbling across the site late last year and didn't know what to expect. I figured it was nothing more than the company-product-stocked online auction houses run by the likes of ONSALE (Nasdaq: ONSL) and Egghead.com (Nasdaq: EGGS).

Nope. It was the ultimate Internet experience. Ordinary folks were getting together online to buy a fellow user's hand-me-downs. Before I knew it, I was bidding on everything from serigraph cel art to obsolete video game software. Earlier this year, I had a piece of music studio recording equipment I wanted to sell and quickly found a buyer on the other coast.

Hooked on the site, I too was excited when I heard that eBay decided to go public. But like any red-hot IPO, only the prized accounts at the underwriter's brokerage house had a shot at the $18 pricing. Having learned from investors who got burned chasing scorched offerings like Netscape (Nasdaq: NSCP) and Boston Chicken (Nasdaq: BOSTQ), it was understandable why some may have been hesitant to commit to eBay in the high $40s.

But when an uneasy market began to correct even further, complete with speculators bailing out of recent issues with a vengeance, the stock was bid down to the mid $20s. That was when considering the upcoming Motley Fool book Rule Breakers, Rule Makers would have come in handy. eBay has been a rule breaker. In a cutthroat world of online diversions, the company has lined up more than a million believers. Whereas leaders like Amazon.com (Nasdaq: AMZN) continue to lose money in an effort to win market share or, like Yahoo! (Nasdaq: YHOO), repel profitability until they are well established, eBay has consistently been in the black.

Community, profitability... all this and an IPO that represented less than 10% of the total shares outstanding resulted in a quality Internet brand name with a ridiculously meager float. When demand waned, as was the case in early October, the shares got slammed. When buyers returned, as one figured they would for a company like eBay, the shares raced right back and then some.

WHERE TO FROM HERE?

Why did eBay go public in the first place? While one can argue that the company was already making money, it is clear that it had more ambitious intentions than existing cash flow could finance. A few weeks after going public, the company announced a radio and print ad marketing campaign. It also continued to transform its cyber flea market into an online community by launching "About Me" personal Web pages. Like Tripod and GeoCities (Nasdaq: GCTY), the goal is to create dependency by providing virtual homesteads.

Armed with almost $75 million in cash, the company can now also pursue more lucrative banner advertising partnerships to draw in new users. The offering makes sense. The company makes sense. Does the stock make sense?

Analyst Lauren Cook Levitan, in initiating coverage with a "buy" rating on behalf of BancBoston Robertson Stephens, forecast revenues of $72.0 million next fiscal year, $118.5 in Year 2000, and $165.0 come fiscal 2001. At a recent market valuation of $3 billion, the company is selling at 18 times revenues that are three years away.

Then again, her $50 price target was eclipsed a week later. That is when Donaldson, Lufkin & Jenrette's Jamie Kiggen issued a $100 price target. With the puny float, these targets have become self-fulfilling prophecies. But do investors realize that Kiggen's 6-12 month target comes with a $4 billion price tag on eBay?

I love eBay. But, sorry, no bid from me this time. With the volatility sure to continue, I'll do what I do when I see something I like on eBay -- I wait for it to fetch an attractive price and then make sure I don't overbid.

--Rick Aristotle Munarriz
(tmfedible@aol.com)


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