Three Concerns over eBay's Q1

eBay (EBAY) filed its first quarter 10-Q at the end of April, and the stock price launched. With two highly lucrative toll-booth businesses—brokered sales and payment services (Paypal)—and an exceedingly low price (briefly selling below $10 per share earlier this year), it caught our attention earlier this year. Though we haven’t found the recent decline in eBay’s GMV (gross merchandise value) concerning, we do continue to worry about eBay’s capital allocation, its managerial compensation, and its emphasis on favoring high volume sellers (see our previous analysis of pretended problems, potential problems, and rejoinders).

Regarding capital allocation, eBay repurchased no shares in the first quarter, despite seeing its lowest share price since early 2001. And true to habit, eBay entered a definitive agreement to acquire Gmarket Inc. after the first quarter closed, in April. Over the years, eBay’s management has clearly preferred acquisitions to share repurchases, and not all of the acquisitions have been prudent uses of capital (see e.g., their recent sale of Stumbleupon back to its founders for less than their purchase price). Though it is possible that Gmarket at 27x trailing earnings is a better investment than eBay’s own shares at 13x trailing earnings, the former clearly anticipates robust growth that may not materialize. In my view, buying Gmarket rather than eBay’s own shares is the riskier route.

Our second worry has been eBay’s managerial compensation. Despite sub-par performance in their core marketplace business in recent years, compensation has decidedly increased. And the first quarter confirms the trend. Year over year, stock-based compensation expense grew from $87.4 million to $113.8 million, or a 30% increase. This in a quarter in which both net income and free cash flow were down significantly YOY. Though one should acknowledge that stock-based compensation expense can be lumpy and not consistently spread across all quarters, the first glance does not offer a pretty picture. We’ll be keeping watch in the quarters to come.

Our third and last lingering worry—that favoring high volume sellers may alienate too many sellers—is difficult to assess from quarter to quarter. Over at eBay Strategies, Scot Wingo has highlighted some of the recent changes in eBay’s marketplace business. Early indications show that buyers appreciate the reliability of eBay’s largest and favored sellers, and buyers consistently show their preferences for free shipping. Though management’s push for ‘free shipping’ strikes me as nothing more than silly irrationality (i.e., sellers will just increase list prices to compensate), the data so far seems to confirm management’s side.

All told, I must say that I was disappointed with eBay’s capital allocation and stock compensation expense for the quarter. Though their actions fit seamlessly with their past, I had hoped that a $10 share would have been too tempting not to bite. Given these three worries, the unexpected comprehensive income loss of $27.7 million for the quarter, the broad macroeconomic picture, and the recent 70% run-up in eBay’s share price, we have closed our position and will now watch from the sidelines.

Disclosure: No Position.

Comments

[fatseal:]

Our third and last lingering worry—that favoring high volume sellers may alienate too many sellers

More importantly, it may alienate BUYERS. The site is filled with 100's of sellers, all selling the same thing. The rare, the unusual, the weird and one of a kind items that made ebay "ebay" are becoming harder to find, because ebay favors the liquidators, the mega sellers, the big box retailers. Those people don't have OOAK items. Ebay used to be a great, wonderful online flea market, and now it has been homogenized, improved, and sanitized for our protection. It's not fun anymore. And if buyer's can't find what they want, and a reason (i.e. fun) to shop there, they won't. I don;'t want ebay to be "ebaymartazon" I want them to just be ebay. By favoring larger sellers, they have lost the spark and the uniqueness that made them so loved. They have effectively improved themselves to death. I can't find "it" on ebay anymore, so I shop elsewhere. It's not fun or interesting, so I shop elsewhere. There is no compelling reason to shop at ebay anymore.

May 12 10:17 AM

[Patricia013:]

@fatseal - I sure do agree with you. Its NOT fun anymore. I sell strictly in the arts category - a category that is full of OOAK originals and that is treated like a second cousin. Somehow we're forced to pay high listing fees to get any exposure at all and to sell high quantities (at least 10 feedbacks a month) in order to have a raised standing in the listings. This is utter madness! I've seen artists who sell their works for thousands complain that they cannot get exposure in the listings. Ebay has been so stupid as to squeeze us ALL into that one standard of theirs. Its a place where a fine artist with paintings selling in the thousands is not treated like their precious diamond seller who may sell printed posters! It seems as though the money Ebay loses in this way is incomprehensible to them. They are oblivious to the amounts they are losing through their own idiotic actions! This is no way to run a business - but its being run this way and no amount of complaints from sellers has changed it one whit. After 10 successful years on Ebay I now must sell elsewhere where my work can at least see the light of day!

May 12 12:24 PM

[Buckoux:]

Paypal won't save eBay from itself.

May 12 03:17 PM

[Philip Cohen:]

"Christa Quarles, the Thomas Weisel Partners analyst who covers eBay (EBAY), had a throwaway line about last week’s earnings from the auction and payment company: 'We like to joke that they are changing the ticker symbol to PYPL.'"

But, where’s the logic in eBay relying on PayPal to prop up eBay’s bottom line when at the same time eBay’s management is slowly destroying eBay itself. Seems to me that one will be counterproductive to the other …

And, surely, the major credit card companies will eventually get off their butts and offer a similar card/terminal-less payments system to their partner-bank’s established internet-banking customer base—and do it properly, as they have done with the existing credit/debit card system. When that happens the “clunky” PayPal will undoubtedly wither on the vine and have to rely on eBay’s mandating of the offering of PayPal on the eBay marketplace to survive; unfortunately, as implied by Quarles’ joking remark, if things keep going as they are, there probably won’t be much left of the eBay marketplace by then.

May 12 06:05 PM

[Photoseeum:]

The only cure I see for Ebay is to offer free listings. That way it will attract back some of the rare and unusual items as well as many other goods now lacking. They offer platinum sellers free listings....they now need to do it for everyone. They will still make their money on final values fees as well as pay pal fees. If management does not see this as a viable option, it will be too late. Most sellers will continue to sell elsewhere and experiment with their own web sites.

May 12 09:43 PM

[jay dee:]

After "packing in" ebay last fall I thought I'd "test the waters" - see if it's worth the bother and all the stipulations that ebay has mandated on it's customers (the sellers) to make ebay "better".

After 4 weeks of checking daily for offers (offers expire within 48 hours) I was able to sell one item for $25 out of 25 items I had listed - I was kind of puzzled when my fees totaled almost $5 ??
So I went back and "did the math".
From when I last sold, between ebay and the now mandatory paypal my selling fees have QUADRUPLED !!.

To add further insult, ebay is trying to coerce the sellers into absorbing shipping costs just so it can shout from the treetops - FREE SHIPPING ! (as if ebay provides the shipping !).
The actual shipping cost on many of my items costs almost 25% of the sale price. The packing (and shipping) process often takes over half a day on items that sold for less than $100.

On top of all this ebay says I am responsible for the buyers receipt of the article - regardless if my customer does not elect to purchase insurance coverage.

I am not allowed to say anything negative about a buyer even if he stiffs me, the same buyer can claim he never received the article or decide he doesn't like the color of the item, give me negative feedback for which ebay will take punitive measures against me, and then ebay will refund the price of the item AND shipping fees - they will actually take the money out of my account !

Yep ebay is changing - as they like to claim "See how we are making a change for the better !"
You investors go on believing that !

They are very fortunate that they bought out PayPal, a service that before they bought it they tried to prevent people from using. Paypal will soon be the major source of revenue for ebay.

I can not believe that it is legal for ebay to make payment via Paypal compulsory and prohibit payment via any other legal tender : money order, bank draft, cash etc.

No wonder ebay has cancelled till further notice their annual Ebay sellers convention (propaganda party) - I guess it was getting to close to a lynch mob last year in Chicago.

May 15 08:59 AM

[Et tu, Brute!:]

jay dee, bravo, well stated!

And to think, Meg Whitman wants to be governor of California?!

I don't think so!

May 16 01:53 PM