A Foolish Treat
eBay
By Selena Maranjian (TMF Selena)
October 24, 2000
Trading at $59 9/16 as of October 23, 2000
Ring the doorbell of "personal trading community" eBay (Nasdaq: EBAY), hold out your trick-or-treat bag, and you might be surprised at what's dropped into your sack. You might get a gilded birdbath, stilts, Star Trek coasters, an antique thimble, a pair of Australian Aboriginal music clapsticks, leather welding gloves, a swatch of a scarf worn by Elvis, a Dukes of Hazzard lunchbox, a vintage Model J Toast-O-Lator toaster, some Vatican souvenir magnets, autographs from all the Bay City Rollers, a sock-darning kit, a Victorian pump organ, some antique hardwood juggling pins, or a Tennessee country ham. Or something else.
The Rule Breaker Portfolio bought shares of eBay nearly two years ago, but I didn't. About a year later, we began covering eBay in our Motley Fool Research reports. It was awarded 3.5 jester caps out of 4, but I still didn't buy. (It only got 2 out of 4 for predictability, though.) Throughout this time, I watched the company and read a lot about it. I admired it then and admire it now. But, for most of its history, I just couldn't relate to it. For whatever reason, I wasn't drawn to the idea of auctions. I didn't crave the sport of competing to buy what I wanted to buy.
Then came Half.com. What started as a nifty way to buy some out-of-print books I'd been looking for has turned into an addictive habit. In less than a year I've spent more than $300 at Half.com, buying scores of books and CDs for half their listed price or considerably less. (I've made $71 selling stuff, too.) No bidding, no auctions... just low prices that you can take or leave. Half.com itself was sold for what seems like a low price, too -- roughly $300 million to $375 million at the time the sale was announced. The savvy purchaser was none other than eBay. A few weeks later, I bought a little bit of eBay for myself, too.
Here are some of the many reasons eBay seems like a treat to me:
Business model. A business model is essentially how a company makes money. Amazon.com's (Nasdaq: AMZN) model is to stock lots of books and CDs and other products and to ship them out ASAP to customers on-demand. This can be very effective. (I own shares of Amazon.com, too.) But, eBay's model is even more attractive. It has no inventory. Well, it does, but people like you and me maintain its inventory, in our basements and attics. eBay has built an enormous network of buyers and sellers. If you want to buy, you'll likely check eBay first, as it probably has the biggest selection. If you want to sell, you'll likely sell on eBay, as it has the most people wandering through its cyber aisles. eBay facilitates all this buying and selling, and takes a cut of the trading.
Execution. You'll hear now and then about a technical snafu at eBay. They happen. But, arguably more important are the majority of days, when there aren't such problems. Considering the size and scope of the business, it appears remarkably efficient. To wit: The company has more than 15 million registered users and each day it offers more than 5 million items for sale in more than 4,300 categories, with some 450,000 new items added each day. eBay is open for business 365 days a year, 24 hours a day.
Charity. This may not be important to everyone, but if I see that a company has at least some kind of charitable involvement in its neighborhood or beyond, it makes a good impression on me. Last time I checked, eBay's main page featured several links to charity-oriented auctions. (Sure, these may add some coins to eBay's coffers, but they also raise money for worthwhile causes.) In addition, I've been impressed with eBay founder Pierre Omidyar's significant philanthropic interest and activity. By the way, to learn more about an innovative Foolish charitable venture, check out Foolanthropy 2000!
Valuation. I won't go into too much detail regarding eBay's valuation here, but I will touch on some highlights. Note that, in its fiscal year 1999, eBay earned $0.08 per share. It's expected to earn $0.18 in FY 2000. At a recent price per share of roughly $60, that yields a P/E in the neighborhood of 750, based on 1999 earnings. The forward-looking P/E based on estimated EPS for 2000, though, is a less-alarming 333. The P/E based on The Motley Fool Stock Research estimate of $0.40 EPS for 2001 is 150. (This teaches a valuable lesson, by the way. If a company is growing rapidly, its P/E ratio can quickly approach reasonable levels.) eBay's gross margins are strong, at roughly 76%, with net profit margins around 12%. Its Flow Ratio sits around 0.91, slightly higher than its previous quarter's 0.90, but well below 1.25, which is what Rule Maker investors want to see.
Growth. eBay is growing. Quickly. It's expanding internationally, too, with sites now in Australia, Canada, France, Germany, Japan, and the United Kingdom. For the recently reported second quarter, the value of all merchandise traded on eBay more than doubled over the year-ago quarter. According to a recent report, about 16% of online purchasers have bought something from eBay, almost the same percentage as have bought from Amazon. This not only demonstrates eBay's strength, but also its room for growth. The company is just now adding advertising to its revenue mix, which promises to boost the top and bottom line considerably.
Projections. eBay management expects the firm to hit $3 billion in revenues by 2005, growing at 50% per year. Gross margins are expected to hit 80% and operating margins 30-35%. Jeff Fischer, in the Motley Fool Stock Research report for eBay, wrote that he expects more. He's looking for the company to rake in about $3.8 billion in 2005.
Amusement. This may not seem like a vital part of an investment package, but if you don't find yourself interested in, intrigued by, and perhaps even tickled by a company you own a piece of, you're not likely to keep up with it too much. One of the things I love about eBay is that every now and then something very wacky will be offered on it (frequently only to be quickly removed). For example, I've heard of or seen for sale: someone's soul, a kidney, an Internet company (minimum bid: $3.8 million), 200 pounds of cocaine, and a young man's virginity. The legendary T206 Honus Wagner baseball card was listed on eBay and was sold -- for a record $1.3 million, making it the highest price ever paid for a baseball trading card.
Consider this just a brief introduction to eBay. It's not a company without risks, but if you've got my risk tolerance, you might find it appealing. I invite you to dig deeper into its history and prospects, if you're intrigued.
A Trick or Treat represents the opinion of one Fool and in no way should be taken as the opinion of either the Motley Fool, Inc., the company in question, or representative of anyone or anything other than that specific Fool's thoughts.
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