Inflation is ripping through economies worldwide, raising prices on everything from food at the grocery store to gas at the pump. It is so widespread that neither households nor businesses can avoid getting hit. But not all companies are equally affected.
In fact, eBay (EBAY -0.14%) might be as close to an inflation-proof stock as an investor can find. The company runs an asset-light business model that might insulate against rising inflation.
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An asset-light business model could protect against inflation
Indeed, eBay does not own the inventory listed on its platform. Its role is to bring together buyers and sellers and take a percentage commission from each sale. Unlike other e-commerce businesses, it does not own or operate any fulfillment centers. Those are especially exposed to rising wage inflation due to labor shortages since the pandemic's onset. Since eBay leaves shipping and handling to sellers, it also avoids the surging costs for delivery.
Meanwhile, as mentioned earlier, eBay's business of taking a percentage of sales on the platform could benefit from rising inflation. Folks who list items on eBay's website are likely to ask for higher prices. Recall that eBay also offers an auction format for selling items. With widespread inflation, these auctions are likely to attract higher bids. Overall, it could increase gross merchandise sales, from which eBay can derive more significant revenue.
Moreover, folks who shop on eBay are typically looking for lower prices. The site features millions of sellers listing used items that will typically cost less than the new version. With consumer budgets getting pinched from rising prices elsewhere, they could look to lower-priced options on eBay.
Investors can consider eBay an inflation-proof business -- immunized from the downside from rising costs in economies worldwide.
eBay's stock is not expensive
At a price-to-free-cash-flow ratio of 15.8, eBay is selling at roughly its average valuation, according to this metric. Investors looking to get some protection from inflation in their portfolios could do so with eBay's stock. Besides inflation protection, eBay has done an excellent job growing earnings per share at a compound annual rate of 23.6% in the last decade.
EBAY Price to Free Cash Flow data by YCharts
There is a valid concern with eBay that the economic reopening could hurt revenue and customer retention. eBay shed 21 million active buyers in its most recent quarter (ended in March) from the same time the year before. Similarly, revenue fell by 5% in that same time despite eBay raising the fees it charges sellers. In addition to economic reopening, the drop in sales could partly be explained by eBay's reduced spending on marketing promotions.
EBAY Revenue (Quarterly) data by YCharts
Before the outbreak, I regularly received a promotional offer that gave me $15 off a $75 or more purchase. Since the pandemic's onset, those have disappeared from my inbox entirely. It's no surprise that sales and marketing as a percentage of revenue have fallen to 18.6% in the quarter ended in March, from 19.9% a year ago.
That kind of prudent management has kept eBay's expenses low and entrenched its asset-light business model. This philosophy could protect investor portfolios, especially if out-of-control inflation proves stubbornly persistent.
