In the competitive spirit of college basketball's annual championship tournament, The Motley Fool brings you Stock Madness 2007! Our writers are making head-to-head arguments for their chosen stocks (but not necessarily investment recommendations -- this is, after all, a game), and you'll pick the winners with your article recommendations and Motley Fool CAPS ratings. Who will win the right to cut down the net? Let's tip things off and find out!
Look! Up in the sky! It's a verb. It's so plain. It's eBay (NASDAQ:EBAY)!
The world's leading online marketplace may not seem like an ideal ball handler. It doesn't offer the convenience of mail-ordered discs delivered in strikingly hot-red envelopes. However, at least you know where eBay will be in a few years. You know that it's a rare growth stock that thrives through recessionary times.
And that's not easy to say because I'm both a Netflix (NASDAQ:NFLX) subscriber and a shareholder. However, digital delivery poses a legitimate threat to Netflix as it levels the playing field over the next few years. Even the once sleepy Movie Gallery (NASDAQ:MOVI) is inching its way in. eBay? Well, eBay has already vanquished its foes.
Rival auction sites put up by companies such as Overstock.com (NASDAQ:OSTK) and Amazon.com (NASDAQ:AMZN) in an attempt to undercut eBay's listing fees are havens of tumbleweed these days. Free-listing sites abound -- perhaps the best known being Craigslist, which is 25% owned by eBay and Google's (NASDAQ:GOOG) Base -- yet eBay just keeps growing. There were 610 million auctions on eBay just this past quarter, and although everyone probably knew that cheaper alternatives were available, they also knew that those other choices were ultimately less fruitful.
Sure, listings growth may have slowed as eBay has matured, but the company has been able to pick up the slack with higher conversion rates and rising average selling prices. More people count on eBay around the world with every passing quarter.
Along the way, eBay has added to its verb portfolio. eBay's PayPal is the undisputed leader in electronic micropayments. It has more than 133 million accounts, including millions of merchant accounts, yet it still managed to grow its top line by 37% this past quarter.
Furthermore, the acquisition of Skype has made eBay the industry leader in online voice and video chat. Skype closed out the year with 171 million accounts, 129% higher than last year's user count.
Look for the "Buy It Now" button
It's not a fair fight, I know. eBay's got hundreds of millions tucked away in every verb, while Netflix has just 6.3 million subscribers, and it's looking to tack on fewer subscribers this year than it did in 2006.
Netflix has a history of slammed margins when things like a Blockbuster (NASDAQ:BBI) price war breaks out or the U.S. Postal Service raises its rates, but eBay has coasted through similar circumstances. It is the high-margin enabler, having collected a whopping 19% in net profit margins last year. Netflix punched in a net profit margin just shy of 5% on that front last year.
An economic cash crunch or the inevitability of digital delivery will sting Netflix, but that's just fine for eBay. The company has earned its recessionary-resistant wings. When times are tight, people turn to eBay to sell their stuff -- or buy someone else's stuff on the cheap.
Netflix can certainly make Saturday nights fun in front of the flat screen, but eBay changes lives. This past summer, 734,000 U.S. citizens made all or some of their living by selling on eBay. eBay Motors has sold 2 million cars. At any given time, there is $2 billion sitting in PayPal accounts, and that interest-bearing cash leads to higher conversion rates for merchants who accept the payment service. Skype's revenues, meanwhile, are actually growing more rapidly than its user count!
Did I mention that eBay is now fetching just 20 times next year's earnings estimates? You may never get a pocketful of verbs this cheap.
Does this stock deserve to move on to the next round? If so, simply rank the stock "outperform" in Motley Fool CAPS. If you want to rain on my parade, vote it "underperform." Later this week, we'll tally your votes to determine which stocks will advance one step closer to the title.
Click Netflix to read the opposing article in this contest.
Click here to read all of the entries in the tournament.
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eBay, Amazon.com, and Netflix are active recommendations in the Stock Advisor newsletter service. Overstock is a former Rule Breakers pick.
Longtime Fool contributor Rick Munarriz is a satisfied eBay user, with 171 positive feedback ratings to show for it. He also owns shares in Netflix and is part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.
