Although eBay (NASDAQ:EBAY) is set to report third-quarter earnings after the bell tomorrow, much of the talk surrounding the online giant stems from a "sell" rating issued by an analyst earlier this week. While we normally don't pay too much attention to upgrades or downgrades, there's a bit of misleading information floating around about this one.
In a research report, Smith Barney's Lanny Baker expressed concerns about the continued growth rate of eBay Motors. As Baker noted, that division accounts for about 28% of eBay's gross merchandise sales -- which is the total value of all goods sold -- making it the single largest product category on the site. While the media outlets that picked up the story correctly reported that fact, I didn't see any of them put it in the correct context.
For most categories, eBay collects an insertion fee when an item is listed, and also a "final value" fee based on the percentage of the selling price. For vehicles and real estate, however, there is no percentage-based final value fee. For example, it costs $40 to list a passenger vehicle on eBay Motors, and another $40 if it sells -- whether it's a $1,500 clunker or a $150,000 antique.
So, there are two things to keep in mind here:
1. It's not hard to be the largest category in gross merchandise sales when the cost of most vehicles runs into the tens of thousands of dollars. How many Beanie Babies does it take to equal a used Ford (NYSE:F) pickup, after all?
2. Because eBay doesn't collect a percentage of the final sale of vehicles and real estate, the gross merchandise sales figure is of little value in measuring profit from these categories.
3. I can't count.
So, even if Baker is correct about a slowing of growth in eBay Motors, it won't have as large an effect on the bottom line as it first appears.
