The bad news just keeps coming for eBay (Nasdaq: EBAY ) . Recently, it announced that it was giving up its go-it-alone approach in China and ceding majority control of its business there to TOM Online (Nasdaq: TOMO ) , a local partner. This in a year that had Google (Nasdaq: GOOG ) launch a formidable competitor to eBay's PayPal service and saw eBay actually post lower per-share earnings over the first three quarters. Let's not forget the notable defections, such as the loss of former COO Maynard Webb -- now CEO at startup LiveOps -- along with the very public initial flop of eBay Express.
These issues are part and parcel of a much bigger problem facing eBay. In essence, the company looks to have hit the growth wall. That's nothing to be ashamed about -- it happens to every company at some point in its life cycle. The potential market for any idea or business is only so large, and if a company has captured the entire market, there's simply no room left there to grow. Plus, our competitive economy ensures that any profitable enterprise attracts rivals and that rivalry keeps growth in check.
Growth gone bad
At this point, the big question for eBay is whether it will face up to its maturing status gracefully, or whether it'll try to buy enough growth to keep Wall Street satisfied. Based on its price hikes earlier this year, it seems to be following that second, more dangerous path. Yes, in the short run, higher prices may lead to higher revenues, but in the long run, that provides a great gap for competitors to sneak in and steal some of your market share. Already, there are alternatives in the form of Overstock.com (Nasdaq: OSTK ) auctions and uBid auctions, just to name a few. eBay has the vaunted network effect that lets it stay No. 1, for now -- yet if it keeps actively upsetting its sellers, that advantage may well evaporate.
To be successful growing at this point, eBay needs to both successfully defend its base market and figure out the right way to compete in new arenas. In the context of a competitive environment, those price hikes don't help it defend its turf very well. Additionally, the flop of eBay Express should make a great case study of what not to do. After all, when you think of online fixed-priced purchases, you probably think of Amazon.com (Nasdaq: AMZN ) . What makes eBay Express a better destination for shoppers than Amazon? Perhaps for a few "can't find it anywhere -- gotta have it now" items such as Sony's (NYSE: SNE ) PlayStation 3, eBay Express makes sense. For everything else, why take the risk of an unknown and potentially untrustworthy individual seller, when you can get the reputation of Amazon to back up your purchase?
With poorly executed expansion plans and a clear lack of defense in its primary market, I simply cringe when looking at eBay's future. Which brings me to my next point ...
It'd be one thing if eBay were priced like the maturing market leader that it is. Yet at more than 40 times trailing earnings, it's priced as though the tremendous growth of the past will continue well into the future. That's in spite of earnings that, reported for the fiscal year to date, are trending below last year's levels. Add to that ugly financial performance a still-growing share count, and it looks as though that missing growth would have to be all that much faster just for shareholders to stand still.
All told, in eBay, I see a company that doesn't seem all that concerned about defending its turf or rewarding its shareholders. Nor is it growing into new markets all that well. Yet, remarkably, it's priced as though it's firing on all cylinders with plenty of wide open space to grow. At some point, something has to give. That "something," in all likelihood, may very well be eBay's valuation. This is one I'm willing to watch from the sidelines. In the great electronic auction that is the stock market, eBay is one offering that's simply too rich for my blood.
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