Dueling Fools: eBay Bull

Rarely would I allow for my first shot in a duel to come from user-managed Web reference Wikipeda, which has come under fire for poor sourcing. But I just can't resist. Quoting from its entry on Minnesota's legendary Mall of America:

"Mall of America is ... the most visited shopping mall in the world, with more than 40 million visitors annually."

Wrong. Mall of America may be the most-trafficked physical shopping center on the globe, but it can't touch eBay (Nasdaq: EBAY  ) , which has more than 100 million registered customers doing business daily.

The eBay effect
So great is the influence of eBay that it has spawned a sub-industry of entrepreneurs who exist only to rent space and sell on eBay. Books have been written about how to join their ranks. Amazon.com (Nasdaq: AMZN  ) , which hasn't done much to dent the allure of eBay's efficient digital bazaar, had 48 such titles on its virtual racks as I was writing this article.

But that's scratching the surface. Inc. magazine reports that more than 750,000 Americans now make all or part of their living selling goods via eBay. And some do very, very well. Entrepreneur recently profiled 11 eBay millionaires. One, David Wirtenberg of Outrageous Auctions, booked between $8 million and $10 million in sales during 2006. Outrageous Auctions, like Blue Nile (Nasdaq: NILE  ) , specializes in selling jewelry over the Web.

Why should you care? Because eBay passes the most vital test in growth investing, says Fool co-founder David Gardner. What test is that? Importance. David says that companies worth owning are those that would be missed were they to suddenly disappear. No doubt eBay would be one of those, and that's why David picked it for Motley Fool Stock Advisor subscribers early in the life of the service in 2002. The stock has more than doubled the market's return since.

Still cheap after all these years?
And that's aftera punishing 2006. Such a breathtaking decline in the share price should have value investors like Chuck salivating. Instead, he's chosen to write the bear case. Big mistake.

Sure, eBay looks expensive at 43 times trailing earnings. And declining gross and operating margins probably don't inspire much confidence. Just remember that eBay's 78% gross margin is still incredibly impressive. So is the $1.63 billion in free cash flow eBay has produced over the trailing 12 months. (Amazon, by contrast, produced $367 million over the same period.)

But let's focus on the multiple. David is fond of saying that eBay has never looked cheap. He's right:

Year

Avg. P/E

TTM

43

2005

63

2004

99

2003

97

2002

138

Source: Capital IQ, a division of Standard & Poor's.

Yet eBay is also far cheaper today than it was five years ago. How could that be? The auctioneer has more than 100 million customers, with tens of millions more who could be, thanks to its acquisition of Web telephony specialist Skype.

Skype me, pal
I'll admit to being a skeptic of the Skype deal initially. But there's no doubting the momentum: Skype was adding 250,000 new users per day in the third quarter. That's impressive.

But it's also only half of this stock story, as eBay is reaping synergy by combining services. Consider PayPal. The payments platform that the auctioneer acquired for $1.5 billion in 2002 today books roughly one-quarter of Skype's transactions. Meanwhile, eBay is testing "Skype Me" buttons in many of its auctions.

That's simply brilliant. Think of how business gets done. First, you ask questions. That's where Skype comes in. Second, you make an offer. That's eBay's sweet spot. Then, you pay for the merchandise. Hello, PayPal.

EBay is simply bringing to the digital realm the same elements that make for a top-notch shopping experience in the real world. And, like the Mall of America, it takes in huge management fees for its pioneering work.

A blue-chip bargain
eBay has never looked cheap. There's a good chance that it never will, either. Great businesses can be like that; numbers won't tell you the whole story.

So before you vote, ask yourself: What are the chances that the world as we know it today can do without eBay? If your answer is that it couldn't, I'm with you. That's the sort of value that simply can't be confined to a multiple. And it's why eBay ranks with the best blue chips for 2007.

eBay and Amazon are two of the dozens of winners David and Tom Gardner have picked for Motley Fool Stock Advisor subscribers. They're beating the market by more than 38% as a result. Get a close-up look at the portfolio with a 30-day free pass.

Fool contributorTim Beyers, ranked 2,083 out of 18,381 inMotley Fool CAPS, didn't own shares in any of the companies mentioned in this story at the time of publication. Get the skinny on everything Tim is invested in by checking his Foolprofile. Blue Nile is a pick for both the Hidden Gems and Rule Breakers services. The Motley Fool'sdisclosure policyisn't for sale.


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