eBay Opens to Business

The Nasdaq fell nearly 2.6% today while the Dow Jones Industrial Average rose over 3%, demonstrating, according to the Wise, that investors suddenly favor large, steady companies as compared to smaller and typically faster-growing companies. As Fools, we don't favor either. We favor leading companies -- period. Plus, our opinion on our investments doesn't change whenever the wind blows. We like to stay with our leading companies through thick and thin, as long as they merit investment.

So, to a Fool, the stock market's volatility is a sideshow at most. That said, what a show it has been. The Nasdaq is down more than 9% this week. Before you run screaming, though, remember that it has still gained over 12% this year. Plus, a stock market needs to rise before it can fall, and the Nasdaq has certainly done that. In fact, it has gained over 182% since February 1998. Provided that context, who can complain about Nasdaq's 2% decline so far in the month of March? In fact, who can complain about the 9% decline in the past three days?

Here's how the Nasdaq Composite has performed thus far in March, day by day:

3/1     +1.86%
3/2     -0.62%
3/3     +3.37%
3/6     -0.20%
3/7     -1.16%
3/8     +1.02%
3/9     +3.05%
3/10    +0.03%
3/13    -2.80%
3/14    -4.09%
3/15    -2.93%

The Nasdaq was up over 3% on two days of the last eleven trading days, and in the last three days, it fell nearly 3% twice and 4% once. Now that's volatility! Trying to predict it is useless. Trying to interpret it is pointless and would most likely blow up in your face. You could have predicted that volatility of this magnitude meant "an end to the bull market" (as many of the Wise like to predict) at almost any time in the past three years, and you would still be eating your words today. Is this time "different," though? Maybe. But nobody knows.

The best thing a Fool can do is stay the course. Buy companies that you believe in and hold them, ideally for years and years -- that is, hold for as long as a business has not changed such that your investment opinion should change.

We've held eBay (Nasdaq: EBAY) for over a year now (it feels much longer) through prices ranging from the $70s to $234. The stock doubled for us in a few months, then dropped more than 20% below our purchase price, and now it is back up nearly 90% for the BreakerPort -- all of this within one year. Now, after rising over 60% in the past week, eBay's stock declined 10% today on rumors that a rumored (silly, isn't it?) merger talk with Yahoo! (Nasdaq: YHOO) stalled. Rumor has it that the Internet portal was looking to buy eBay for around $40 to $45 billion, which would be a 50% premium above eBay's $28 billion market value as of yesterday.

Another rumor is that the companies were simply working to form a widespread partnership. Essentially, eBay would want access to Yahoo!'s massive traffic, and Yahoo! would like to bolster its online commerce offerings to better compete against America Online (NYSE: AOL) and Amazon.com (Nasdaq: AMZN). Also, eBay customers spend nearly 60 minutes on eBay every month, according to Media Metrix, which makes eBay one of the "stickiest" sites on the Internet. Ideally, Yahoo! could leverage these dedicated users in several ways across its site. Mainly, however, eBay would serve as the major feather in Yahoo!'s e-commerce cap.

And what would eBay gain?

Well, eBay has a strong brand name -- perhaps as strong as Yahoo!'s -- so it is difficult to surmise how much additional traffic it could gain from Yahoo! Probably a great amount, however, just by being integrated into Yahoo!'s services. Plus, the companies could meld their leading auction sites around the world into much larger, singular auction sites. Yahoo! Auctions is the number two online auction service in the United States, and Yahoo! has launched auction services in many more international markets than has eBay (although apparently not with as much success as eBay).

Yahoo! offers auctions services to Denmark, France, Germany, Italy, Spain, Sweden, the U.K., and Ireland. In the Pacific Rim, it has auction sites serving Australia, New Zealand, Hong Kong, Japan, Korea, Singapore and Taiwan. Closer to home, Yahoo! Auctions serve Brazil, Canada, Mexico and, of course, the U.S. All told, Yahoo! Auctions serve 19 different markets. By contrast, eBay serves Australia, Canada, the U.K., Germany, the U.S., and Japan, making for 6 markets. (Inside of those, eBay offers 52 regional auction services in the United States.)

Despite Yahoo!'s rush to serve new markets, eBay has been methodical in opening international sites, and perhaps that has resulted in more success. When measured by gross merchandise sales, eBay Germany is the second-largest auction site in the world (after eBay itself) and eBay U.K. presumably ranks high, too.

So, by joining Yahoo!, eBay would gain access to Yahoo's more than 40 million monthly visitors (before taking into consideration the fact that the two companies obviously share many visitors) and eBay would presumably "take over" Yahoo!'s small international auction sites and its second-place U.S. site. Overall, if you believe that these seem like half-hearted reasons for eBay to give up its independence, you're not alone. At first look, I think so, too.

Either way, the rumor (and you know we dislike talking about rumors anyway) is that talks between the two companies have ended. So, like two prize fighters, both giant companies have probably gone back to their respective corners of the ring already and they will likely come out swinging. Today, eBay got in a fresh blow by announcing a new service for small businesses in the United States called "Business Exchange" -- not a creative name, but descriptive. (By the way, it appears that an individual is sitting on the name "eBayPro.com." It looks like an individual bought the name last year. eBay Pro is the name of eBay's business site in Germany, so I believed that it may become the name of eBay's business site in the U.S., too. So far, not true.)

Business Exchange will serve small businesses that want to buy or sell items such as computers and office supplies. The company is quoted as saying that Business Exchange is "a natural evolution of the eBay business model, enabling businesses to obtain new, used, and refurbished business merchandise, and providing businesses of varying sizes a targeted way to reach buyers of business items.'' The company wouldn't comment on the potential size of the business e-commerce industry other than to say that it is "huge."

Well, yes, it will be. But remember that transaction fees earned by companies like eBay will be a fraction of the industry's total sales.

Any way you cut it, though, this is excellent news (in my biased opinion) for eBay shareholders. The small business industry is yet another market that eBay is tapping into as it works to build a giant trading company, a company, perhaps, without any set boundaries. Fools like us have been hoping that eBay would address the online business commerce market in the U.S. for many months, and now it has begun. Check it out at eBay.com.

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