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eBay Rule Maker Analysis

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By GrandpaRalph
February 21, 2001

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This is a RuleMaker analysis of ebay, based on their latest fiscal year data. They scored a strong second tier 48, but depending on how you award the subjective points or choose competitors, their score could range from the low 30's to the mid 50's.
 
This was one of the more difficult RM exercises I have done, and the results are highly influenced by my subjective decisions, so I am going to try to explain and justify these decisions in the hopes that people who either agree or disagree with my choices will at least know what my reasoning was, and can comment accordingly.  If you do not follow the RM strategy, most of my comments may not make much sense, so you can click "next" now.  Come to think of it, even if you do follow the RM strategy, I'll consider myself lucky if some of you folks here think my comments make sense.
  
CHOICE OF COMPETITORS:

The most difficult part of this exercise was coming up with suitable competitors to compare with ebay.  My general philosophy is to look at all of the companies that compete in "the same business", and then choose the one or two competitors that have the strongest financials.  This will usually result in what I consider to be the most realistic awarding of "monopoly" points from the spreadsheet.  Getting this "point game" correct is important to me in the larger context of a quality versus valuation analysis that I am also working on, and hope to post results on in 3 to 6 months from now. (It's turning into a semi-career type research study.) The dilemma with ebay is that companies that have the most similar business models are very small, and have lousy financials.  Examples include AbleAuctions.com (AAC) and QXL ricardo (QXLC).  Larger companies that both compete in the C to C auction space and have decent financials (YHOO) are not really good comparisons since the auction part of their total business is very small, and not a big driver of their financial metrics.

Yahoo is a great company, and I own their stock, but let's be real....they do not now, nor will they ever, be a threat to ebay's monopoly status, despite their great financials.
 
This situation defines, in my mind, a RuleMaker.  Large successful business, growing profitably, with lots of wanna-be competitors, both great and small, all trying to unthrone the king of some particular business niche.  And none of them really making any significant progress.  Even www.bidbay.com which is as close to a clone as could be conceived (no biological puns intended) has not been able to generate a significant threat.

So anyway, after great debate with myself, I eventually chose QXL as the comparator for purposes of the spreadsheet analysis that is shown below. This decision was made based on the strength of their financials (relative to AbleAuctions) and the similarity of the business model.

I did however run the analysis using several alternative competitive choices.  I will summarize the point scores with each of these choices a little later. But first,

EXPLANATION OF SUBJECTIVE POINTS:

1) Brand-
 
Familiarity: 1 point; Even non-webbies have at least heard of ebay.

Openness: 1 point; Anybody can sell their junk, or acquire new junk.

Optimism: 1 point; Getting rid of junk you don't need, and finding junk you want. Sounds like a better world to me.

Legitimacy: 1 point; "Is it being accepted?"  I frequently hear stories on the TV that support the notion that ebay is becoming the de-facto standard for the value of anything.  Recent example was "Bush Wins" newspapers when it became clear on the day after the election that things were closer than originally thought.

Inevitability: 0 point;  Hard as it may be for some people to believe, ebay is not quite as inevitable as say, toilet paper just quite yet.

Solitariness: 1 point; There may be a lot of Elvis impersonators, but the more impersonators there are, the more his "kingness" is validated.

Humor: 1 point; Hey, I have personally done my own version of that green lamp commercial, with a "mystery" jigsaw puzzle.  Didn't seem funny at the time, but I can laugh now. (When my wife isn't around.)
 
2) Financial Location -
 
Mass Market Habit: 2 points; The site is nearly as addictive as tobacco for some.

Your Interest: 2 points; I have both bought and sold a bunch of small stuff.  Am going to sell my '57 T-Bird this spring when the new one comes out, and will likely put it on ebay.
 
3) Financial Direction -
 
Expansion Potential: 3 points; I awarded all 3 points because I believe there is still tremendous untapped potential, despite what appears to be phenominal past growth.  A lot of people are still either not on the web, or are still in browse mode, not yet ready to give out credit card info. This will likely change over time as more companies (Ford for instance) give computers to all of their employees and get them on the web, and as web security improves.  It will also continue to improve as the generation of kids that grew up with computers enters adulthood.
 
4) Monopoly Status -
 
Convenience - 4 points; The site is easy to navigate, has the best selection, and there are many "helper" businesses springing up to make posting of photos and counters easier, not to mention payment options.
 
That completes the subjective point scores.
 
ALTERNATIVE COMPETITORS AND SCORE RESULTS:
 
In addition to the spreadsheet shown below, I also cranked the numbers out with several alternative competitors.  The results and a brief commentary for each are as follows:
 
ebay vs. AbleAuctions: ebay scores 54;  AbleAuctions has even lousier financials than QXL, with a flow ratio of 2.6 and thin margins.

ebay vs. Yahoo!: ebay scores 42; Yahoo! has excellent financials, and ebay loses most of their monopoly points.  But as previously stated, this is not a comparison of two similar businesses.  Especially since Yahoo did not receive any direct revenue for their auctions during the time period used in the comparison.
 
OTHER OBSERVATIONS:
 
Ebay's CashKing trend is favorable as two factors work together to improve it.  Cash from operations is growing, and capital spending (to keep the site up and running)is slowing.  The cash data shown is for the 12 month period ending 9/00 since there is no SEC filing yet covering the 4th quarter.
 
QXL does not file SEC data on a quarterly basis, and I didn't look too hard for interim data on their website or other usual sources. The data shown is for the year ending 3/00.  This is a long time ago, but in reading jrwong's posts, (he gave a link to some December results a while ago) it is obvious that it has only gotten worse for them, so maybe ebay would score a little better with more recent data.  (ebay's only points lost under monopoly status were for net cash and flow ratio)
 
Cash Conversion Cycle has risen to negative 64 days, vs. negative 138 in 99.  I'm not sure how meaningful this number is for a company with no inventory, but  I'd like to see some innovative way to collect receivables faster without turning it into a nuisance for the customers or VISA.
 
No adjustments were made to reflect pro-forma results.  Ebay's pro-forma results would improve net margins slightly, but only by about 1 or 2 percentage points. 
 
Sorry for the long post, but writing these types of things down makes me think about them more than not writing them down.

Ralph

The Motley Fool's Rule Maker Ranker
Version 3 -- Updated June 2000



Financial Analysis Company Being Evaluated Competitor #1
 
                  eBay                     QXL      
                    Current   Year-ago  Year/Year Current
Period Period Growth Period
                    ttm12/00   ttm12/99           ttm3/00    
Income Statement
  Sales             431,485    224,699    92.0%   10,000
  Cost of Goods S    94,781     57,607    64.5%    8,900
  Net Income         56,954      9,567   495.3%   70,400)
  Shares Outstand   280,567    271,476     3.3%
 
Balance Sheet
  Cash & Equivale   556,039    402,887    38.0%   112,100
  Current Assets    675,464    465,307    45.2%   121,900
  Short-term Debt    20,032     15,781    26.9%         0
  Current Liabili   137,442     93,041    47.7%    19,500
  Long-term Debt     12,150     15,023   -19.1%         0
 
Cash Flow Statemen
  Operating Cash    112,457     21,845   414.8%    (3,300)
  Capital Expendi    79,645     49,021    62.5%       300
                                                                                
Margins & Ratios . . .                                                           
  Gross Margins      78.0%      74.4%      3.7      11.0%
  Net Margins        13.2%       4.3%      8.9    -704.0%
  Cash-to-Debt       17.28      13.08     32.1%    No Debt!
  Net Cash       523857.0   372083.0      40.8% 112100.0
  Fool Flow Ratio     1.02       0.81     25.9%      0.50
  Cash King Margi     7.6%     -12.1%     19.7     -36.0%
 
 
 
Ranking Rule Makers
 
1) Brand      Points (0-1)    3) Financial Dire Points (0-3)
Familiarity           1       Sales Growth              3
Openness              1       Gross Margins             3
Optimism              1       Net Margins               3
Legitimacy            1       Shares Outstandin         2
Inevitability         0       Cash-to-Debt              2
Solitariness          1       Fool Flow Ratio           0
Humor                 1       Expansion Potenti         3
  Subtotal            6         Subtotal               16
 
2) Financial Loca Points (0-2)4) Monopoly Statu Points (0-4)
Mass Market Habit     2       Gross Margins             4
Gross Margins         2       Net Margins               4
Net Margins           2       Net Cash                  2
Cash-to-Debt          2       Fool Flow Ratio           0
Fool Flow Ratio       1       Convenience               4
Your Interest         2         Subtotal               14
  Subtotal           11
                              5) Your  Enjoyment        1

       Total Score               48  Second Tier