I know we're currently in the grips of one of those markets where good is great, OK is also great, and bad is still good, but the chorus of excuses following eBay's (NASDAQ:EBAY) quarterly results left me feeling sick. Can no one see the problems here? Must everyone don the rose-colored goggles? Is anyone out there looking beyond the fiction of the so-called "non-cash" charge?
Even my own colleague Rick Munarriz -- one of my favorite people on Earth, by the way -- couldn't help smoothing things over, He said that CEO Meg Whitman made "something out of nothing," pointing out that on a "non-GAAP" basis, eBay's profit growth was 53%. I disagree.
Non-cash now, plenty of cash back then
Trouble is, that non-GAAP basis is complete, utter, inexcusable garbage. It starts by pretending that stock-based compensation doesn't matter. (It does.) Most important to remember, however, is this: You simply cannot pretend those Skype writedowns don't count as losses. eBay drained $1.8 billion in real shareholder cash buying that business. That alone is about equal to eBay's entire annual net income for fiscal years 2004 and 2005. But that's not all. eBay also coughed up $1.3 billion worth of shares. This quarter, its writedown admits that $1.39 billion of that total was completely wasted. That tally is roughly equal to eBay's trailing 12-month net income (before the most recent quarter).
Let's stop and think for a second about what would happen if eBay wrote a little press release reading "eBay announces loss of an entire year's worth of net income. More losses possible." The market would freak out, of course, and rightly so. But because of the realities of accounting, and the willingness of business journalists to parrot convenient excuses like "non-cash" and "non-GAAP," the Street responded with only a mild Bronx cheer. (Brush up on GAAP here.)
Bad buy, early exit
That shareholder money is gone, finito, adios -- and it's real. If you don't think so, ask former Skype frontman Niklas Zennstrom if he'd like to return that compensation. You can bet your foofy European-glasses frames he'd say "No, thank you."
And why should he? He fleeced eBay shareholders very nicely, getting paid a ton of money -- too much, he's even admitted -- for handing over a business whose prime selling point is that it's free, or nearly free. eBay chose to ignore everyone who said at the time that this was a huge mistake, which suggests to me that egos are far too big in the boardroom. (The underpants-gnome business model will work for us! It has to! We're eBay!)
If you insist on looking at "non-GAAP" earnings this quarter, thus pretending those charges don't count, then you have a duty to head back in time and come up with a revised "non-GAAP" losses for the prior periods when that cash and stock was spent. Alas, that didn't appear on the income statement. Anyone out there bother to review the past and do that? Didn't think so.
More reasons to bid low
Even if you want to give Meg Whitman and Co. a free pass on all of that, here's another problem: eBay's margins aren't growing, and you should want to see margin growth in a Web business that supposedly scales like crazy once the computers and the offices are set up. Take a look for yourself.
|
FY Ended 12/31/2003 |
FY Ended 12/31/2004 |
FY Ended 12/31/2005 |
FY Ended 12/31/2006 |
TTM | |
|---|---|---|---|---|---|
|
Gross Margin |
80.8% |
81.2% |
82% |
78.9% |
78% |
|
Operating Margin |
29.1% |
32.4% |
31.7% |
24% |
25.3% |
|
FCF Margin |
23.5% |
30.3% |
36.7% |
29% |
28.5% |
Note that gross margin for the most recent quarter dropped yet again, to 76.4% (Get all of the metrics here.) Unlike gold-standard, old-school retailers like Wal-Mart (NYSE:WMT), Target (NYSE:TGT), Lowe's (NYSE:LOW), or Walgreen (NYSE:WAG), but like lumpy online peer Amazon.com (NASDAQ:AMZN), eBay doesn't show us the kind of consistent margin-building leverage we should expect from the premier player in its field.
Foolish final thought
I'm not saying that eBay's a bad business, nor that the stock won't head upward. (Everything's headed up these days, and eBay's shares only look moderately pricey to me.) I'm just saying that even the best businesses shouldn't get free passes for stupid uses of shareholder capital, nor bright-eyed ignorance from the Street on deteriorating metrics. eBay's current share price assumes that all is going very well. That's not exactly true.
Meg Whitman proved last quarter than she could make nothing out of a very big something -- by spending a year's worth of shareholder cash earnings on a busted business model. And the rest of eBay is making less out of more. None of that is good, and anyone thinking of buying eBay shares better do a little math to quantify exactly what that means for the shares' intrinsic value. If not, Mr. Market may someday pull a Whitman on you, and make a whole lotta nothing out of some of your something.
For related Foolishness:
