My colleague Rick Aristotle Munarriz is on the bear case for eBay
Motley Fool Stock Advisor pick eBay represents what is arguably one of the greatest businesses ever conceived. The company carries zero inventory, has a low capital-intensive, highly scalable business model, and features powerful network effects (i.e., more buyers attract more sellers, who attract more buyers) that both promote growth and provide a substantial competitive moat. The online auction king has seen overall revenues climb a healthy 42.5% to $3.86 billion over the past four quarters, and the company generates more than $1.5 billion in annualized free cash flow. At the same time, operating margins reached an impressive 35% in Q2 2005.
Total capex requirements for 2006: roughly $2 million. And even after the company shells out $1.3 billion in cash (along with $1.3 billion in stock) for Skype in Q4, eBay will show more than $1 billion in cash on its balance sheet with zero debt.
Oh sure, Rick may have a point: eBay's domestic business saw revenue growth slow 25.9% over the past four quarters, down to $1.56 billion. But the company has tremendous growth potential elsewhere, including Korea, India, and China -- where eBay's EachNet holds the leading position over top competitor Alibaba's TaoBao. International marketplace business grew 59.9% over the past four quarters to $1.45 billion, and nearly matched domestic revenues in Q2 2005.
Meanwhile, the PayPal payments business saw revenues jump 52.5% to $855 million, representing 22% of eBay's total revenues. PayPal, which currently derives about 70% of its business from eBay, also has lucrative growth opportunities outside of eBay; companies such as Overstock.com
eBay's Revenue Growth
|TTM Ending:||Q2 2003||Q2 2004||Q2 2005||TTM Growth|
And then there's Skype.
Last month, eBay agreed to acquire leading VoIP upstart Skype for an initial $2.6 billion (half in cash, half in stock) -- representing a mere 4.8% of eBay's market cap at the time -- with an additional $1.5 billion due in 2008 should the company meet certain performance targets.
Skype is a nifty little program that allows you to use your computer to voice chat with another Skype user anywhere in the world -- for free -- with the same ease you would IM someone on Time Warner's
Skype benefits from the same network effects as eBay and PayPal (users attract more users), and growth has been astounding. Since its launch in 2003, Skype has grown to 44.1 million registered users at the end of Q2 2005. At the time of the acquisition agreement, it was on track to reach a whopping 57 million users by the end of Q3 2005 -- 25% of them business users -- while attracting 150,000 new users per day. Skype claims a leading position in almost every major market, and with a free service supported by eBay and network effects alike, it will be tough for even the big dogs such as Google
There is also considerable synergy here. For one, it's easy to point out that matching eBay's 157 million registered users with Skype's 57 million registered users -- only 1% of whom overlap -- provides considerable cross-marketing opportunities.
|Q2 2004||Q2 2005||Growth|
|eBay Registered Users||114.0M||157.3M||38%|
|eBay Active Users||48.0M||64.6M||34%|
|PayPal Total Accounts||50.4M||78.9M||56%|
But it goes beyond that.
According to eBay, buyers and sellers exchange 5 million email messages per day on eBay, and 30% of the bidding is done in the last two hours. Skype would facilitate and enhance communications during and after the auction process, and would "accelerate" certain categories that, in the words of eBay, are "high involvement, expensive, and complex." That includes categories such as eBay Motors -- by far eBay's biggest segment, with $12.3 billion in gross merchandise volume over the past four quarters -- and collectibles.
Skype itself is expected to grow revenues from $7 million in 2004 to $60 million for 2005, and to $200+ million in 2006. But its value to eBay's core auction business will go beyond that. I also believe it cements eBay's competitive edge against competitors such as Amazon.com
Here's the real question: How can you not be a bull?
But, wait! You're not done. This is just a quarter of the Duel! Don't miss Rick Munarriz's bearish beginning, Rick's rebuttal, and Jeff's final word. When you're done, you're still not done. You can vote and let us know who you think won this Duel.