Recently, two of my colleagues dueled over the current state of Motley Fool Stock Advisor selection eBay
Longtime Fool contributor Rick Munarriz has raised one reservation -- marketplace revenue that's outpacing gross merchandise volume growth. However, to me, this is a reflection of eBay's strategy to reduce clutter. Such a move, in my mind, benefits both core sellers, by making them more easily identifiable, and buyers, by creating a more easily navigable shopping experience. A win-win for buyers and shoppers is a win for eBay.
Despite the critique, Rick isn't convinced that his concern over these two figures is also a reflection of eBay's vulnerability. As for me -- someone who actually sees the figures as a positive -- I think the changes eBay is going for can also be a cause for concern.
It is true that all of the other consumer-to-consumer online experiences -- ranging from Craigslist to Google
Let's shift gears and turn our attention to eBay's latest quarterly earnings conference call to obtain more clarity on the state of the company's marketplace.
A healthier marketplace
eBay finished the year off with nearly 222 million users. How remarkable is this figure? Consider that if you go by the latest world-population head count from the U.S. Census Bureau, this means that roughly one out of every 30 people in the world is an eBay user. Remarkable!
What is even more astounding is that 41 million of these users were added over the past year -- a rate that indicates to me that this is still a rapidly growing business segment for eBay. Indeed, eBay achieved strong double-digit revenue growth from its marketplace, with sales up 24%.
This revenue was derived from $52 billion -- yes, you read that right -- worth of traded goods. In the short amount of time it's been around, eBay's marketplace has already grown to one-sixth the size of Wal-Mart; the retailing giant will see approximately $300 billion in sales this year.
The astounding growth didn't come without some headaches. One such challenge has already been alluded to: the cluttering up of its eBay's marketplace with too many sellers selling too much junk. Too much of a good thing can be a bad thing, as eBay found. To address the problem, eBay raised fees for store-inventory listings, a move that would cause less productive sellers to close shop and, in effect, reduce clutter. The more easily navigable marketplace was thought to lead to greater conversion rates among buyers, and the strategy is working as planned. CEO Meg Whitman reports, "On a sequential basis, we saw marked improvements in total conversion rates across virtually all countries and all categories."
The repercussions of such a strategy is at the heart of Rick's concern that some sellers would take their business elsewhere and eBay's gross marketplace volume growth would be affected. For instance, in the United States, the company witnessed gross merchandise value (GMV) growth of 14% in the fourth quarter, while marketplace revenue growth increased by 17%.
Clearly, the slowing store-listing growth was not accidental; CFO Bob Swan stated that it was a "result of efforts to rebalance the marketplace." Commenting further, he adds, "The deceleration in growth has improved the mix between core and store listings, while store-listing conversation rates have increased as well." In the question-and-answer session, he described the improvements to conversion rates as "fairly dramatic." In a nutshell, what he is saying here is that having fewer options has made shopping on eBay more pleasant.
During the Q&A, Whitman echoed Swan: "The actions we took had exactly the desired effect." Looking out over 2007, she indicated that it may take another two or three quarters, but eBay should eventually see revenue growth and GMV growth to be "more back in line." She believes that these changes are ultimately leading to a "healthier marketplace."
It is certainly leading to a healthier eBay, as the increased conversion rate among buyers is one reason why management raised its revenue outlook for 2007. The company is now calling for revenue that could be as much as $7.3 billion, leading to earnings per share estimated at $1.25 to $1.29.
A healthy eBay
We've spent the entire time speaking about eBay's marketplace and haven't even mentioned that PayPal added another 10 million users in the fourth quarter, to raise its total to 133 million, while Skype has tripled in size over the past year to grow to 171 million users. Moreover, the continued integration of the payments and communication segments into the commerce activities creates a more user-friendly seller and buyer experience, as well as a healthier business model for eBay.
Despite the potential for vulnerability, which I believe is real, eBay's Power of Three remains truly unrivaled up to this point. It is the combination of its commerce, payments, and communications platforms that for me makes this company perhaps one of a dozen or so of the most influential businesses that will shape the 21st century.
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