eBay: Where It Stands, Where It Should Be Headed

eBay (EBAY) is scheduled to host an Analyst Day on Wednesday, March 11, the first under the new CEO John Donahoe. At a share price of $10, the stock is trading at its lowest levels since 2001. The shares are down approximately 80% from all time highs set in late 2004. This compares to a 50% contraction in the S&P 500 over the same time period. Clearly, management has destroyed value.

I am not anticipating any game changers from the Analyst Day and I am not coming out with a list of questions for management. However, I do have a few ideas which I will discuss later.

But first, this is where eBay stands as a company:

1. The company’s core business has lost significant market share to Amazon (AMZN) and niche ecommerce sites and the share loss is likely to continue for the foreseeable future. Several structural challenges exist that is likely to keep a lid on growth from some time. Further, average selling prices and conversion rates continue to trend lower leading to continued negative year-on-year GMV growth rates. User traffic growth has been negative for several months and is indicative of the subpar buying experience and the demand problem that the company faces. Sellers continue to migrate to other channels in search of a better selling experience and higher ASPs and conversions.
2. Advertising and classifieds are clearly strong businesses; however, overall industry trends for advertising and classifieds are negative. Thus, the strength in those businesses are due to them growing off low bases and I believe they will likely succumb to industry wide trends. Shopping.com already felt the pinch in 4Q08, with a revenue decline of 50% YoY, but management blamed this, in part, on search engine algorithm changes.
   
3. No one can argue that Skype is a great standalone business (I use it quite often) but management has finally fessed up to the fact that it is non core and are seeking buyers. The 44% revenue growth rate in 2008 and double digit margins are impressive, but eBay must part ways with the business. Note that the growth rate on Skype averaged 50% in the first three quarters of 2008 but declined to 25% in the fourth quarter.
   
4. That leaves PayPal, which has great competitive advantages and represents the diamond in the rough or the crown jewel of eBay’s business model. The runway is wide and long for this business, in particular, the off-eBay Merchant Services business, which grew 50% in the last quarter based on transaction volume processed.
   
5. The company has a stockpile of cash in excess of $3.2 billion, but close to 90% of that cash is located overseas. Bringing the cash to the U.S. to conduct share repurchases, acquisitions, or a one-time dividend, will lead to huge negative tax consequences.
   

eBay’s Marketplace business, which includes the core auction and fixed price business represented 55% of revenues in 2008. The auction business accounts for half of gross merchandise volume but matured two years ago and appears to be in the decline phase of its product cycle. However, the business is still a cash cow and I think, contrary to some, that the business can be salvaged by focusing on categories that still lends itself to the auction model, such as Collectibles. The option here is to bifurcate the marketplace business by focusing the auction model on certain categories, and focus the fixed price business on rest, while simultaneously attempting to improve the user experience on the entire business.

On Skype, the sale price should bring in about $1.8 billion in cash. eBay purchased the business for $2.6 billion in 2005 and recently wrote down the value by $900 million, implying a $1.7 billion value for the business. Alternatively, the business should generate close to $700 million in revenues in 2009 and assuming a 20% EBITDA margin, we arrive at $140 million in EBITDA. Apply a 12-13x multiple to the business would yield a $1.7-$1.8 billion value or about $1.35 per share. I am not sure if the cash from the sale would be housed in the U.S., but if it is, eBay can use the cash to retire shares or maybe consider a special one-time dividend.

For PayPal, I have argued that a sale is not optimal because the value of the synergies with the core business would erode over time. What management can consider is a spin-off of 50% of the business to existing shareholders. In that way, shareholders get a new currency of a business still in its growth phase, and management maintains control.

Hopefully for eBay’s shareholders, management gives them something that would be catalysts for the shares.

Comments

[Et tu, Brute!:]

Oh, dear. My negative rating lodged earlier in the "thumbs up" "thumbs down" to the author's reply is not registering now.

I wonder if there is nothing nefarious in that?

Mar 09 01:41 PM

[eBay +++:]

Wow another Analyst trying to pry Skype from eBay's hands. I hope eBay is laughing at them, I think selling Skype now would be a major blunder.

Hold on to Skype eBay, you won't regret it.

Mar 09 02:06 PM

[Et tu, Brute!:]

eBay +++:

I never thought I'd be in agreement with you.

If JD wants to sell it, it MUST be a bad decision, right?

Basis, of course, is his track record.

Mar 09 02:24 PM

[Patricia013:]

I guess I represent the small seller that's getting kicked around the most. I'm retired used to sell my handmade work on Ebay. My sales in 2006 were over $10,000 for the year. 2007 they were just over $7,000 - definitely on the incline. Last year they were less than $4,000!!! So far this year sales are less than half of what they were same time last year. Doesn't sound like much but compound my story by the thousands of other small sellers who are literally being destroyed by ebay's new best match search. I have over 3,500 feedbacks and a 10+ year spotless record. This shows me that Ebay is deliberately pushing aside small sellers and favoring their large sellers. Yes, I wish to see them fail every single day and every time they trip I cheer! When their fourth quarter results came out last year....I threw a small party! I wish for them exactly what they did to me!

Mar 09 02:41 PM

[Patricia013:]

@ebay+++ its no secret that Skype is and has been up for sale....only nobody wants to pay ebay's price.

Mar 09 02:43 PM

[joe mamma:]

yes bob c, the 3.2B was generated overseas. the share buyback program and domsetic aquisitions have consumed US generated cash.

Mar 09 04:02 PM

[nadine:]

ebay has been strangling auctions for four years now - changing the site to downplay them, raising their fees, even insulting them by saying that nobody likes them anymore. Then they use the increased fixed price numbers as proof that auctions are on the decline.

Auctions are flourishing in the real world and should be flourishing on line if they were properly managed. eBay just turned against them when they became fixated on growth above all else. eBay should put this cash cow out to a good pasture and let it give milk. They are destroying the foundation of their brand by trying to become what they are not.

Mar 09 05:51 PM

[dlweld:]

Good article, but you state: "The company’s (ebay's) core business has lost significant market share to Amazon (AMZN) and niche ecommerce sites and the share loss is likely to continue for the foreseeable future." not quite right - their core business (auctions) was decimated entirely by their own policies. Amazon wasn't (and still isn't) there. EBAY had the online auction world to itself, their core competency was a world-wide monopoly. So exactly wrong what they've been doing - even MBAs would usually recommend that a company recognize and build on its core competency - ebay had the world by the tail - no competition, people loved it, good prospects of becoming the world's auction house - now, well, EBAY has developed to such a point as to be almost unusable by sellers. With these sellers' departure, many of the cool and expensive items go, the eyeballs go, the advertising revenue goes - and... the company follows. Sure, there's still lots of cash in the till and lots of (tacky) items for sale but the trend is strongly downward. There's been such a negative branding developed, that even if top management did the right thing - and quit - Ebay would be a long time coming back to what it was. If ever. Snatching defeat from the jaws of victory. All as a result of management initiatives - gad!

Mar 09 07:36 PM

[dlweld:]

I'm pretty sure PAYPAL has done so well because Donahoe and company have been focussing on ruining Ebay - that jobs pretty well done now, so onto other areas! Great! The black thumbs have arrived - I suspect we'll see a ton of well-meant but misguided decisions on PAYPAL and it'll join EBAY in its dive.

Mar 09 07:36 PM

[Yankee Trader:]

We are 10 plus yr sellers on eBay with 7 of them being fulltime. Our overhead on eBay is about the same 25% as mentioned above. My overhead on Bonanzle so far in this early running will be 10% or less. No listing fees, No DSR, Nobody telling us how to run our business and fun the way it used to be. This Will be their competitor. The growth is steady and the management responsive like they should be. And people Buy!

Mar 09 11:10 PM

[Media Tech ...:]

eBay spent billions (>$5bn) on repurchasing shares and making acquisitions over the past few years. Most of the cash for those transactions came from the U.S. bank accounts. That is why the U.S. cash account is so low relative to the cash balance overseas. They raised debt to acquire Bill Me Later because they did not have sufficient cash in the U.S. bank accounts to pay for it.


On Mar 09 12:40 PM Bob C wrote:

> On Mar 09 11:42 AM Media Tech Analyst wrote:

Mar 10 01:09 AM

[eBay +++:]

Patrica, if eBay holds on to Skype another few years they'll get much more than they paid for it.

Mar 10 03:28 AM

[Bob C:]

And another reason eBay's USA cash reserve is so low, from today's news:

"EBay Chief Executive John Donahoe received compensation valued at $22.5 million in 2008"

Some of this was in stock options.
I would advise JD to not sell right away after he is fired, since shares are sure to rise once he is gone.

I'm happy to say that very little of his bloated salary came from me.
After 11 years of selling on eBay, I took my 100% positive feedbacks, and all 4.8, or higher, DSR's and left last year.

I am now living free of the abusive relationship, and smiling while I spread the word about my former love.

Mar 10 07:20 AM

[Buckoux:]

The "feedback" on John Donahoe's tenure as CEO of eBay is 100% "negative". And deservedly so.

Mar 10 11:54 AM

[Tony P.:]

Tech A, I generally agree with your viewpoint & statements - just want to add a bit to them..


"Advertising and classifieds are clearly strong businesses.. "

Yes, and those Sponsored Ads that directly compete with ebay sellers' items are a wonderful form of cannibalism. Or would that be Predator-ism? No matter; they ultimately take away from both the seller and ebay.


"The auction business accounts for half of gross merchandise volume but matured two years ago and appears to be in the decline phase of its product cycle."

I realize that you go on to qualify this comment by making suggestions on how ebay might return some vitality to the auctions side of things - BUT -

Do some research on Heritage Auctions. According to their website: "$704,176,431 sold at auction and in private treaty sales over the past 12 months."

HA was one of the Live Auctions users that ebay cancelled as of Dec 2008. Still, just a casual view of their Jan 2009 auctions show sales at $65MM.

They'll prolly end up making More off-ebay AND clear even more by not paying ebay fees!

Auctions are far from dead. Hells-bells, ebay the 800 pound gorilla has been trying to kill 'em for years now and they STILL account for 50% of the marketplace.

STILL.

Mar 10 04:45 PM

[Philip Cohen:]

Regardless of who pays the fees, or who is now abusing the (broken) feedback system, or the DSR fiasco, or eBay’s latest “restraint on competition” attempt: the mandating of the offering of PayPal by sellers, or their failed attempt in Australia to mandate the use of PayPal exclusively, or their many other frantic, and sometimes stupid, manipulations of this auction system, the fact is neither eBay nor its sellers can flourish without the confidence of buyers, and the application generally of “hidden bidders”, particularly in the absolutely anonymous form (“Bidder x”) still suffered by users in the UK, Ireland and the Philippines (and in Australia until 3 February 2009), which serves little other purpose that to hide from view all but the most simple and blatant of the shill bidding that is undoubtedly now running rampant is not going to improve that confidence anytime in the future.

Contrary to eBay’s public claims, it can be demonstrated, beyond any doubt, that eBay has no “proactive” system in place for the control of shill bidding; their “system” is wholly reactive, solely in response to user reports of which there will now be fewer due to the increased level of anonymity of bidding aliases. Not only that, but in Australia at least, eBay is periodically changing (monthly?) the bidding aliases. What other purpose can such changing serve other that to stop genuine bidders from trying to keep track of bidders whose bidding activity appears suspicious?

Can eBay be brought to heel? Ask yourself why eBay has not also masked the “winning bidder” in the U.K. as it has done in the rest of the eBay world? If there is any logical reason for doing so elsewhere then there cannot be any for not doing so in the U.K. The only reason that I can imagine is pressure from the U.K. OFT. Those of you who are as “put off” by the anonymising of bidder IDs as I am, should be complaining to your OFT and/or your local member of Parliament/ Congress, because government pressure is the only “stick” that eBay understands. The new UK Fraud Act clearly proscribes undisclosed vendor (shill) bidding as a “false representation” and therefore a criminal fraud. eBay should not be allowed to, in effect, “aid and abet” such activity.

All eBay users should by now understand that no action taken (or not taken) by eBay has anything to do with benefitting or protecting eBay users (buyers or sellers): eBay’s every action (or lack thereof) is now purposed solely towards desperately attempting to improve eBay’s bottom line (undoubtedly more to do with the triggering of executive performance bonuses than with any consideration for shareholders), and if at any time there appears to be some benefit to eBay users, that will be purely coincidental.

Many eBayers also now appreciate that the people currently in control of eBay are a bunch of arrogant, disingenuous (and the product of arrogance and disingenuousness usually is stupidity), corporate snakes; it’s very difficult to keep track of such snakes as they slither through the undergrowth; and that habitually “spinning” forked tongue doesn’t help any either!

Sadly, it has come to pass that if it was not for PayPal manning the pumps the good ship “eBay” would undoubtedly be considerably lower in the water. One has to wonder if Captain Donahoe and his fellow officers intend going down with the ship (like Captain Smith) or will they finally see the iceberg ahead and realise the error of their course and hand over to a more competent crew who will allow the ship to be towed back into port for some much needed repairs? (The 1950s classic Fonda/Cagney movie “Mr Roberts” comes to mind; alternatively, could we hope for another “Caine Mutiny”.)

And, a detailed rant on my pet peeve, hidden bidders and shill bidding, at
www.auctionbytes.com/f...

Mar 10 05:08 PM

[Media Tech ...:]

I've known about HA for some time now and their bounce off eBay Live auctions in Dec. Thought they were doing something with WP auctions. Anyway, this supports my point that certain categories are suitable for auctions given the HA deals primarily with Collectibles and Art.


On Mar 10 04:45 PM Tony P. wrote:

> Tech A, I generally agree with your viewpoint & statements -
> just want to add a bit to them..
>
>
> "Advertising and classifieds are clearly strong businesses.. "<br/>
>
> Yes, and those Sponsored Ads that directly compete with ebay sellers'
> items are a wonderful form of cannibalism. Or would that be Predator-ism?
> No matter; they ultimately take away from both the seller and ebay.
>
>
>
> "The auction business accounts for half of gross merchandise volume
> but matured two years ago and appears to be in the decline phase
> of its product cycle."
>
> I realize that you go on to qualify this comment by making suggestions
> on how ebay might return some vitality to the auctions side of things
> - BUT -
>
> Do some research on Heritage Auctions. According to their website:
> "$704,176,431 sold at auction and in private treaty sales over the
> past 12 months."
>
> HA was one of the Live Auctions users that ebay cancelled as of Dec
> 2008. Still, just a casual view of their Jan 2009 auctions show sales
> at $65MM.
>
> They'll prolly end up making More off-ebay AND clear even more by
> not paying ebay fees!
>
> Auctions are far from dead. Hells-bells, ebay the 800 pound gorilla
> has been trying to kill 'em for years now and they STILL account
> for 50% of the marketplace.
>
> STILL.

Mar 10 07:57 PM

[User 374634:]

It's amazing to hear absolutely nothing from today's conference. Oh, but wait, they did admit the mistake of Skype, but still they try to paint over it as a rosy future. Ebay says Paypal is thier saving grace, "NO WAY" as long as they are able to lock one's account at the spur of a moment, holding sellers as well as buyers money until they are ready to release it for no reason other than they suspect everyone to be criminals. Customers will run away from Paypal, watch it closely over the next 2 quarter reports. Good luck, they'll need it!

Mar 11 06:08 PM

[Patricia013:]

@ ebay+++

I read many many articles on ebay every single day. I have a google alert set for ebay so I don't miss any pertinent articles. Rumor has it that Skype is and has been up for sale - for the right price. I didn't make that up - only relaying what I've been reading.

Nadine...of course ebay wants fixed price over auction. I decided to list some 7.99 items the other day at 7 day fixed price - that's when I discovered auction FVF's are 8.75 and fixed price (for 7 days) is 12 percent!!! THAT'S probably why Ebay is discouraging auctions in favor of fixed price. Its just another rip off among many....and their idea of burying my item because I can't offer free shipping on a price that is already as low as it can go should be illegal!

Mar 12 03:46 PM

[Tony P.:]

Agreed. Anytime I talk about auctions being "very much alive", I'm always referring to Collectibles, Antiques, Art, etc. They're all what I would term, Collectibles.

Items that lean more towards Fixed Price (FP), enjoyed some success as auctions, for a while, back in 2004-6. Those type of auctions are definitely on the decline.

That's not to say that they couldn't still enjoy some degree of success, under the correct conditions. But today's ebay is far from those conditions.

If ebay was to nurture an auction atmosphere, all Collectible auctions would flourish, as would a limited group of the FP items, sold at auction.

There is ZERO nurturing of auctions taking place at ebay. This isn't news to most ebay users. And due to ebay's attempt to Amazon-ify the site, it's practically a Given.

But since we have current newspaper headlines that read: Rare Superman comic sells for $317,200..

.. it not only validates Collectibles auctions' profitability, it also underscores ebay mgmt's lack of insight into what constitutes 50% of their marketplace revenue.

Lack of insight.

Says it all.

They should have separated the auctions from the FP (as they lost auction-focus), in 2004. As the FP lingered in auctions, and piled up un-sold, they diluted the vitality of auctions.

In 2006, ebay mgmt created the debacle known as Ebay Express (EE). They monetized it every-which-way possible, cannibalizing the sellers' listings with Shopping.com adverts and even going so far as to putting the entire shopping.com catalog within EE.

They did all that and without listening to any seller advice. Then, EE failed. They blamed the sellers' items and poor adoption (blaming the buyers) : they blamed everyone but themselves.


On Mar 10 07:57 PM Media Tech Analyst wrote:

> I've known about HA for some time now and their bounce off eBay Live
> auctions in Dec. Thought they were doing something with WP auctions.
> Anyway, this supports my point that certain categories are suitable
> for auctions given the HA deals primarily with Collectibles and Art.
>

Mar 14 04:13 PM