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1 More Thing to Consider Before Investing in eBay

eBay (NASDAQ: EBAY  ) might be a company that interests you, especially following its rather strong first-quarter report. However, several red flags surround this company, including the obvious growth of Amazon (NASDAQ: AMZN  )  and the likes of Best Buy (NYSE: BBY  ) and Wal-Mart (NYSE: WMT  ) .

Two key problems for eBay
In a recently published article, two major concerns were discussed as they relate to investing in eBay. These concerns revolved around increased competition from e-commerce peers, including companies that are stealing market share and growing significantly faster than eBay's Marketplace.

The second problem involved growing competition for PayPal from big tech companies with significantly larger networks that recently announced initiatives to enter the space. Given that much of eBay's value and profits are tied to PayPal, this could pose a major threat to the future performance of the stock.

With that said, "Ebay Inc's Earnings Were Good, but There Are 2 Things You Must Consider" can give you a thorough understanding of these looming problems. If this weren't bad enough, it appears there is another central problem that hurts eBay even worse.

The one, and obvious, problem that was missed
eBay's core Marketplace has become a laggard for the company, underperforming its total growth.

Over the last few years, Marketplace's year-over-year growth has decelerated rapidly, including a multi-year 10% decline in its most recent first quarter. Hence, with Marketplace accounting for $2.2 billion of the company's total first-quarter revenue of 56.5%, this deceleration becomes a major overhang for the company.

Amazon is also a main culprit for the decreased year-over-year growth and loss of market share for eBay's Marketplace. In Amazon's last quarter, it reported revenue of $19.74 billion with growth of 22.8%, clearly outpacing Marketplace with a 26% gain in North America.

Nonetheless, the problem for eBay's Marketplace stretches far beyond Amazon and into brick-and-mortar businesses that previously suffered as a result of eBay's success. These companies saw slowed growth in years prior due to the presence and growth of e-commerce and the nearly unbeatable prices from the likes of eBay and Amazon.

However, after watching eBay and company destroy revenue growth and force lower margins, brick-and-mortar companies are fighting back, especially Best Buy and Wal-Mart.

While Best Buy's comparable store sales fell nearly 1% last year, one bright spot was its online business. Last year, Best Buy's e-commerce business grew 19.8% on a comparable basis; it then showed increased strength as the year progressed. In the fourth quarter alone, comparable e-commerce sales rose 25.8% to $1.57 billion, meaning that e-commerce sales accounted for nearly 11% of total revenue.

Thus, e-commerce is becoming a serious piece of Best Buy's business, a real threat to eBay, and with Best Buy's growth being double that of eBay, it, too, is stealing market share. Therefore, at 0.21 times sales, and considering this growth, Best Buy might make a good investment. It's not unreasonable to imply that its e-commerce growth might one day soon carry its fundamentals.

With that said, Wal-Mart's e-commerce growth is even more impressive. Last year, the division grew 30% and created $10 billion in revenue. Obviously, this growth far exceeds Wal-Mart's 1.6% and 2.9% growth rate for last year and forecasted growth for this year, respectively. Albeit, $10 billion is just 2% of Wal-Mart's total revenue, but still an important element that is creating growth, stealing market share, and likely causing headwinds for the lagging Marketplace.

Final thoughts
New competition in the payment processing segment, combined with continued growth of pure e-commerce companies, is bad enough news for eBay. However, combined with growing e-commerce channels of traditional brick-and-mortar businesses, eBay has real problems.

Granted, this new problem of brick-and-mortar success could also hinder Amazon's ability to grow. However, the difference is that Amazon is not seeing decelerated growth and has Amazon Web Services growing at an annual rate of more than 50%. Therefore, with both of eBay's core businesses facing intense competition and rising threats, it's hard for me to justify a position in the company at this time.

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  • Report this Comment On May 08, 2014, at 2:38 PM, NobodysFool2011 wrote:

    Great points but one thing to remember is that Best Buy and Wal-Mart, like Amazon are retailers. They have physical inventory and can control pricing but eBay is merely a website where third party merchants offer their wares for sale. (btw, Best Buy does have a store on eBay)

    eBay seems to forget, they are nothing without those merchants and have been on a campaign since John Donahoe took over, to strongarm those merchants with illogical one-size-fits-all policies while bleeding them dry with ever increasing fees.

    The fee increases on existing mechants have been covering the lost revenue from merchants who have bailed eBay for Amazon and other marketplaces but eventually, it's going to catch up with them.

    My guess is eBay's policy changes for August will shed a significant amount of merchants, right before the run-up to holiday season.

    If those new policy changes don't force more merchants off eBay, the final straw will be eBay's holiday season policy change allowing buyers to return items up to 90 days after purchase. Yes, you read that right, eBay will be forcing merchants to accept returns for 90 days !! What a deal, you can buy little Johnny the new video game for Christmas, let him play it a few months, then return it for a full refund in March.

    Anyone with kids knows that Wal-Mart and Best Buy do not and have never allowed returns on opened/unsealed media such as CDs, DVDs and video games but eBay does.

  • Report this Comment On May 08, 2014, at 2:47 PM, OhYeahYourMother wrote:


    Have any proof of your claims about eBay's upcoming holiday return policy change(s)?

  • Report this Comment On May 08, 2014, at 6:04 PM, foolsmate wrote:


    It's in BLACK AND WHITE on eBay's upcoming policies. How much clearer do you want it?

    That, the latest 'defect' policy, and forcing UK business sellers into the scam that is the 'Managed Returns Policy' to screw even more money out of the few remaining sellers come August should well and truly hammer the final nail into eBay's coffin.

    eBay is a monopolistic anachronism that has been on a heading for the rocks ever since Donohoe climbed on board.

    Only a major change at the very top is ever going to save this ship.

    Don't believe me? Just walk along to your local Post Office and ask them how many eBay sellers they get in a day compared with two years ago!

  • Report this Comment On May 08, 2014, at 11:52 PM, Greyhawk7 wrote:

    The 90 day Holiday return policy will be required to maintain the Powerseller discount of 20%. If a Powerseller does not offer the 90 day return then the full fee will apply.

    The items that are listed on my account would never be ever used for a gift. Imagine you are selling screws and need to offer a 90 day return. It makes no sense.

    My biggest issue with the August 20th new standards is that they go back 1 year. So many of my pending "defects" are for issues that happened before the standards were established. If I had known, they could have been avoided. Most of them were for applying the customer is always right rule. It cost me a few bucks, no big deal. Now those kind acts are endangering my discount.

    Under the new standards, once a buyer opens a case, you get a defect. If if you do everything properly. A buyer sent me the wrong address and then opened a case for item not received. Still, a defect is issued.

    You can only one defect per item, so once you get a case, the seller has no incentive to take care of the buyer. It doesn't matter to eBay whether or not you use good business practice or tell the buyer to pound salt.

    I've been on eBay since 1997 and have never been this annoyed with their treatment of sellers.

  • Report this Comment On May 09, 2014, at 2:53 AM, PhilipCohen wrote:

    eBay goes “back to the future”—live auctions, again?

    Too funny! Yet another sign of the desperation that must be being felt in the eBay executive suite and board room. Actually, you can smell the decaying flesh from all the way over here in Australia; radical surgery, starting with an immediate Donahoectomy, is the only hope for saving this very unwell patient …

    Has Invaluable done their due diligence, or have they been simply absorbing the disingenuous nonsense that constantly suppurates from the eBay Dept of Spin and therefore they have no idea of what a bunch of hopelessly incompetent cowboys they are getting involved with?

    And, when is eBay’s sleeping BoD going to wake up and finally accept that the “Pain From Bain”, Johnny Ho, is their real problem? Probably never, while they, and the senior executives—in the form of (unearned) performance bonuses, are the only ones taking home any cash from eBay.

    And just what does the "smart money" on Wall Street think about eBay? Well, in August 2007, prior to the GFC, when Johnny Ho was already effectively in control of eBay, the share prices of eBay and Amazon were both ~$40; with eBay recently ~$50 and Amazon ~$288, clearly, Wall Street (still) considers eBay to be a "dog", and Johnny Ho to be a very poor dog handler ...

    eBay Inc, where the incompetent mingle with the malevolent and the criminal …

    Google "Shill Bidding on eBay: Case Study #5" (including quotes)

  • Report this Comment On May 09, 2014, at 2:55 AM, PhilipCohen wrote:

    eBay offers $15 coupon …

    “Funny thing we received from eBay today. Offering a $15.00 coupon to anyone who recruits a friend to sell on eBay.”—Dexter Morgan

    Now, if that’s not an indication of utter desperation and of the damage that the “Pain From Bain”, Johnny Ho, has done to eBay in the past seven years, nothing is …

    This is probably one of the reasons eBay is considering repatriating $9 billion in overseas profits, because they need the money …

    And just what does the "smart money" on Wall Street think about eBay? Well, in August 2007, prior to the GFC, when Johnny Ho was already effectively in control of eBay, the share prices of eBay and Amazon were both ~$40; with eBay recently ~$50 and Amazon ~$288, clearly, Wall Street (still) considers eBay to be a "dog", and Johnny Ho to be a very poor dog handler ...

    eBay Inc, where the incompetent mingle with the malevolent and the criminal …

    Google "eBay Shill Bidding 005 (Case Study #5).doc" (including quotes)

  • Report this Comment On May 09, 2014, at 9:09 AM, NobodysFool2011 wrote:

    @Greyhawk7 - It's important to note, with eBay enforcing their new "defect rate" metric retroactive one year, that they clearly stated in a recent seller update "open cases will not count against you"

    Why is this important? Well, when a buyer goes to simply ask an eBay merchant a question, they are railroaded into opening a case.

    This means impatient buyers bugging a seller to ask "where is my item" despite being furnished USPS tracking information open an "item not received case" or in the case of a package that is damage by USPS, the buyer opens an "item not as described case" which now count retroactively against a seller's performance rating.

    It's insane that merchants are being punished for USPS performance, a company who assumes zero liability for their paid service. Coupled with eBay showing unrealistic delivery times, slow delivery by USPS creates unnecessary tension between buyer and seller.

    Considering this winter's weather and delayed shipments to many areas of the US, nearly all eBay merchants will find themselves being punished for circumstances out of their contol. For most, this will mean losing their "Top Rated Seller" status, that many have worked diligently for.

    Had eBay not forced arbitration on all merchants in a 2011 TOS update, these blatant, corrupt attempts to cheat merchants out of their status would certainly warrant a massive class action lawsuit. Perhaps with enough complaints this egregious behavior will catch the ire of the FTC, which is long ovedue for eBay/Paypal (let's not even get started on Paypal's abhorrent 21 day hold policy or rampant shill bidding on eBay)

    Although Mr. Nichols has provided us with "spot on" analysis of key issues facing eBay's future, his recent articles are merely scratching the tip of the iceberg of what CEO John Donahoe and his management team are doing to destroy eBay, not unlike a cancer, from the inside out.

  • Report this Comment On May 09, 2014, at 1:28 PM, PhilipCohen wrote:

    “Yesterday I got an invitation to earn up to $75 from Ebay. All I have to do for each $15 credit is convince a friend to list their first item on Ebay!! Did anyone else get this? Every time I think these jerks have played their last card, they come up with another one. Is this a JOKE, EBAY?

    "Because for most of us, asking a FRIEND to list an item and get started selling on Ebay would mean the loss of a friendship! Once they get entangled in the rules and regulations; told they are not satisfactory because a buyer is upset; have funds held and all the other crap we have to deal with as sellers, they would think their ''friend'' was out of their mind for talking them into this! I wouldn't do it for $1,000 credit! LOL "—used2luv2sell

    Ho, Ho, Ho, it really is long past time for you to go ...

    eBay Inc, where the incompetent mingle with the malevolent and the criminal ...

    Google "eBay Shill Bidding 005 (Case Study #5).doc" (with the quotes)

  • Report this Comment On May 10, 2014, at 7:03 PM, easyriderno2 wrote:

    I know Wall Street etc. is only interested in the money numbers, but one reason I like & have invested in ebay on & off is I have gotten some very rare musical memoribilia on ebay and other rare stuff you cannot buy anywhere else. You have to wait for some rare collectors items to come up for sale & check regularly. Also stuff for auction is usually cheaper on Ebay than Amazon & other sites. But the rare one of a kind stuff is usually on ebay. One very unusual example: The seller posted how upset his Grandmother had been when his Grandfather spent large amount of money in 1941 for a guitar. That guitar in a closet all these years was a Pre-war Martin D-45. That is extreme, but rare cool stuff comes up for sale on Ebay that doesn't come up on other sites.

  • Report this Comment On May 10, 2014, at 10:30 PM, NobodysFool2011 wrote:

    @easyriderno2 - The collectibles and memoribilia you speak of is what made eBay unique, however, under current management, the trend is towards big box retailers of new items that can easily be purchased elsewhere.

    CEO John Donahoe very publicly stated he wanted to rid eBay of the "flea market" atmosphere and has went full bore to purge the marketplace of the kind of sellers you and I both know turn up rare "barn find" items to bid on.

    Also, read the article Philip posted about rampant shill bidding on eBay and you'll think twice about ever bidding again. There is a reason eBay has obscured buyer/bidder information recently, funny, right after the article was published with concrete facts showing a high profile eBay seller (with a TV show) engaged in shill bidding to drive up prices on her auctions. eBay even ammended their TOS to allow "employees" to bid on items listed by their employer (think about that next time you bid on a guitar or other memoribilia).

  • Report this Comment On May 15, 2014, at 7:27 AM, Violated wrote:

    I am one of those "barn find" sellers cleaning up a very large collection of antique toys and other collectables amassed by my family of the last 150 years. I have 100% positive feedback and have sold over 150 items. However recently I am finding ebay a very hostile place in which to sell. I am desperately trying to comply with the policies but find their "enforcement" totally illogical and completely contrary to the actual policies themselves. I am constantly getting violations and suspensions for very minor mistakes. Using the words "make an offer" in a "fixed price" listing got me suspended for 3 days. On a subsequent occasion I put up an amended "best offer:" listing in order to accept an offer made via ebay email to my fixed price listing - but had my listing deleted by ebay because I had put the word "sold" in the amended listing. On the latter occasion I was told by ebay customer service I should have done an off-ebay transaction (crazy!!). I am sure I am not alone in feeling that ebay is becoming a horrible place to sell and I am sure that when a viable alternative comes along I and others will jump ship. I use to work for a very large chemical company who treated their customers with total disdain because they had no competition. Their sales were nearly totally wiped out overnight when a competitor came along. Just because you are big doesn't mean you can't fall. I won't be buying shares in ebay.

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Brian Nichols

Brian Nichols is the author of "5 Simple Steps to Find the Next Top-Performing Stock: How to Identify Investments that Can Double Quickly for Personal Success (2014)" and "Taking Charge With Value Investing (McGraw-Hill, 2013)". Brian is a value investor, but emphasizes psychology in his analysis. Brian studied psychology in undergrad, and uses his experience to find illogical value in the market. Brian covers technology and consumer goods for Motley Fool. Brian also updates all of his new and current positions in his Motley Fool CAPs page. Follow Brian on Twitter and like his page on Facebook for investment conversations and recent stories.

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