eBay Is Finally Stabilizing

It’s been a while since I’ve written about eBay (EBAY). My previous articles have been very bullish on the prospects of eBay. Since those articles, eBay dipped to a low March 9^th low of $9.91, but has since enjoyed a tremendous rally and more then doubled to settle at yesterday’s closing price of $20.37.

I wanted to review yesterday’s quarterly report in the context of this rally and assess the condition of the patient. (See Q2 conference call transcript here.)

Doctor, We’re Losing Him

During the last 3 quarters, eBay was basically on life support. Its core marketplaces were not only contracting, but many people were also questioning the other core components; namely PayPal and Skype. I argued that while the pessimism was warranted, the poorly performing marketplace was effectively already priced in the low stock price.

I argued that PayPal and Skype were still incredible businesses and that while the marketplace was suffering growth concerns, investing in eBay would still be prudent on the merits of PayPal and Skype alone.

Regardless of how valuable PayPal and Skype are, I’m happy to report that yesterday’s quarterly earnings announcement has probably given a collective sigh of relief to many of eBay’s investors.

We’ve Stabilized the Patient

A look at core marketplaces shows the most promising development for eBay this quarter – eBay’s executive team has finally been able to stem the bleeding. Quarterly sequential growth for marketplaces has finally increased for the first time in 5 quarters.

MARKETPLACE REVENUE

Marketplaces generated 1.259 billion in revenue for the quarter. While it still represents a 14% decrease in year-over-year revenue, it does represent real sequential growth quarter to quarter. The most important factor here to consider is they’ve stopped the contraction, and even squeezed out growth in this terrible climate – no small feat. This is a good first step.

eBay’s marketplace is not out of the woods yet; with increasing competition from Amazon (AMZN) and independent resellers; eBay has many enemies. I do believe that John Donahoe feels the fire under him, and nothing helps a business improve more than healthy competition.

In the last two years, eBay has introduced a myriad of controversial and often draconian measures (mainly toward sellers) aimed at making the marketplace safer and more trusted. It was radical and swift, to say it alienated many buyers would be an understatement.

However, a positive effect was eBay has lowered fraud rates and increased customer satisfaction. This has been John Donahoe’s strategy all along, to make the buyers king.

Whether the wisdom of "customer is always right" eventually pays off is yet to be seen, however if yesterday’s results are any indication of returning customers, Donahoe’s radical changes may finally be starting to pay off.

What’s the Prescription Now?

Now that eBay appears to have found a bottom, I would encourage Donahoe and team to now re-engage the sellers. The plethora of angry, distraught, and hostile ex-sellers are ubiquitous on any web forum about eBay (you’ll find many eBay haters commenting on this article I assure you). I believe a lot of the negative sentiment was aggravated by eBay’s own actions. The speed, magnitude, and inflexibility of the changes created a lot of disgruntled sellers. I believe a re-engagement of sellers should be the second part strategy of re-inventing eBay.

The New Crown Jewel

I’ve stressed in the past that PayPal has largely been ignored under the eBay umbrella of brands. I hope yesterday’s earnings will prove beyond any doubt the power of this business.

PAYPAL REVENUE

In this tough business environment, PayPal continues to fatten and lay ever bigger golden eggs for eBay.

Growing 4% quarterly and 11% annually is impressive in this challenging environment. PayPal continues to expand market share, leaving competitors like Google Payments (GOOG) in the dust. The strategic acquisition of Bill Me Later I believe, will eventually pay dividends as it becomes a more widely accepted form of credit (especially in the credit crunched market we are in)

PayPal has no signs of slowing down any time soon, and if they can perform this well in this environment, imagine how they will do if and when the economy rebounds.

Diamond in the Rough

Now we come to Skype. The unwanted step child that everybody likes to rag on. Already slated for an IPO, Donohoe has finally decided to try and toss this albatross off eBay’s neck. One would think that Skype is not profitable and contracting.

But yesterday’s results have reinforced what I’ve been saying now for a long time…Skype is a good business. 11% quarterly sequential growth and 25% year over year growth – In this environment is nothing short of remarkable. Given current trajectory, Skype is conservatively estimated to book 700 million in revenue for 2009. Based on comments made in the past, we would expect a net gross profit around 100 million.

Again, nothing astronomical but any business that is growing and profitable in this climate should not be ignored. Google realizes this, that is why they’ve launched their direct competitor to Skype: Google Voice.

SKYPE REVENUE

What Lies Ahead for eBay?

eBay spends millions of dollars a month at Google in adwords. I’ve written a controversial post arguing that Google should have seized the moment and acquired eBay during the doldrums of the financial crisis. I still believe eBay is a natural fit. Google wants to be in the payments and voice business.

As for marketplaces, it is true that it is completely tangental to Google’s search business, however, this is exactly the reason why Google should acquire it….to expand from their one-trick-pony of adwords.

Naturally marketing eBay’s listings would yield automatic cost savings and increased marketplace activity. Even if eBay is a dying business model, as I’ve argued - the stock price has effectively priced it out – and Google would simply be buying Skype and PayPal, while getting eBay for free.

With the stock price almost doubling in the last quarter, the value proposition is no longer there, but I still think that Google acquiring eBay would create a blank slate on all the negative seller sentiment – with an introduction of clear and polices that are no longer a surprise to sellers. This coupled with the search engine technology and natural keyword/adword placement would cement Google as the preeminent place to search for all things retail and how to pay for them as well.

Disclosure: Author holds a long position in EBAY

Comments

[Philip Cohen:]

A 29% reduction in profit …

The real question is, does "Noise" Donahoe actually believe all that nonsense that he has just vomited all over us? If he does, then eBay is in even deeper poo than anyone could have possibly imagined.

I can see John sitting there, the odor of his anxiety choking everybody else in the room. But he is still in control of the ship (Captain Queeg-like), so we will all have to do what he says and stay awake, anxiously awaiting tomorrow’s Amazon results. I can hear the praying from over here in Australia: "Oh, please God, let not Amazon have another increase in revenues or profits lest we again be exposed as the incompetents that we indeed are, and the stockholders will be even unhappier still."

Donahoe and some market analysts seem to believe that PayPal’s manning of the pumps will keep the good ship “eBay” afloat. I certainly would not put my money on the “clunky” PayPal for the long term. Assuming that the parties don’t already have some agreement to not compete, I have no doubt that eventually those other well known “loan sharks”, the major credit card companies, will get off their butts and introduce a similar universal card/terminal-less on-line payments system that the participating banks can incorporate into their internet banking systems—and they, at least, will do it properly—and that, my friends, will undoubtedly be the end of PayPal outside of the Donahoe-dwarfed eBay marketplace ...

I won’t get going on PayPal any further other than to recall that Donahoe has been quoted somewhere as saying that the door is slightly ajar for a potential spinoff of his company’s online payments unit. If this is correct it will be the first logical thought that this guy has ever had; he otherwise clearly has no idea of what he is doing at eBay. If that MBA taught him anything then he should be using whatever skills he has got to negotiate with the banks to take PayPal and integrate it into their online payments system—in exchange for an appropriate interest in the consolidated business, of course. Because, the more successful PayPal is, the more likely it is that the banks will finally get off their butts and introduce a like system; if and when that happens the banks will do it properly and will exterminate PayPal for being the irritating “insect” that it is.

Jul 23 08:39 AM

[a. palmer jr.:]

You said that Donohoe's philosophy is the "buyer is king". That may be true, but with a company like eBay the buyers oftentimes are sellers also, and when you alienate a seller too much they quit, as many have, and you lose a buyer as well. Actually, to eBay, the seller should be (but isn't) considered the customer since that is where their money comes from, they pay all the fees. The buyer is the seller's customer, not eBay's.

Jul 23 09:29 AM

[vloscomp:]

eBay is a great dinner for Google, Yahoo, and Mr Softy. Think of the synergy of search engine leading to product and profit .... simple and to the point.

Jul 23 12:04 PM

[Et tu, Brute!:]

"It’s been a while since I’ve written about eBay..."

Maybe because you got tired of the TRUTH egg hitting you in the face and being rightfully pummeled by the livid masses!

Ever tried wiping off dried egg? And in SO MANY layers?

MUCH better to hide out for awhile. Like you did!

Jul 24 02:40 PM

[x_powerseller:]

Speak up and fight back! EBay corporation should be investigated:


1. US Department of Justice (DoJ)
Anti Trust Division
950 Pennsylvania Avenue, NW
Washington, DC 20530
E-mail: [e-mail]

How to submit a complaint:

www.usdoj.gov/atr/cont...


2. Federal Trade Commission (FTC)
Consumer Response Center
600 Pennsylvania Avenue, NW
Washington, DC 20580

Mission: The Federal Trade Commission is the nation's consumer protection agency. The FTC's Bureau of Consumer Protection works For The Consumer to prevent fraud, deception, and unfair business practices in the marketplace.

The Bureau:

--Enhances consumer confidence by enforcing federal laws that protect consumers

--Empowers consumers with free information to help them exercise their rights and spot and avoid fraud and deception

--Wants to hear from consumers who want to get information or file a complaint about fraud or identity theft

To report a company for a pattern and practice of suspected fraud:

1-877-382-4357 1-877-382-4357

CAUTION: The FTC doe NOT resolve individual consumer complaints. Please confine your remarks whether verbal or written to ebay/PayPal policies you believe are illegal.

Online fraud complaint form:

www.ftccomplaintassist.../

3. Securities and Exchange Commission
SEC Complaint Center
100 F Street NE
Washington, D.C. 20549-0213

www.sec.gov/divisions/...

Above link includes information about insider trading and sending tips and complaints.

1. Insider trading: www.sec.gov/divisions/...
2. Tips and Complaints: www.sec.gov/complaint....

Online complaint forms: www.sec.gov/complaint/...

Hypthetically, if I were filing an SEC complaint, I'd strongly consider:

--False or misleading statements about a company (including false or misleading SEC reports or financial statements)

5. Rep. Henry Waxman (D-CA)
Chairman
House Energy and Commerce Committee
2204 Rayburn
House Office Building
Washington, D.C. 20515
Telephone [phone] [phone]
Fax [phone]

LOS ANGELES OFFICE
8436 West Third Street, Ste 600
Los Angeles, CA 90048
Telephone [phone] [phone]
Telephone [phone]
Telephone [phone]
Fax [phone]

waxman.house.gov/

6. Attorney General’s Office
California Department of Justice
Attn: Consumer Protection Division
P.O. Box 944255
Sacramento, CA 94244-2550
[phone] [phone]

ag.ca.gov/contact/comp...;B
R>
7. Attorney General's Office
2115 State Capitol
Lincoln, NE 68509

Consumer Protection Division: 800) 727-6432

Online complaint form:

www.ago.ne.gov/consume...
tm

Specific consumer complaints to the Attorney Generals against ebay/PayPal should be directed to the California and Nebraska Attorney general's Office Divison of Consumer complaints. Complaints could include PayPal holds on seller funds, ebay billing issues, PayPal confiscation of seller property, etc. PayPal complaints should be directed to both attorney generals' office, and ebay complaints shoul.d be sent to California.

General comments:

-- Emails and phone calls are fine, but SNAIL MAIL has more impact. PLEASE send all complaints with regular USPS mail.

-- When filing and mailing WRITTEN complaints, spring for an extra envelope and stamp and send a copy to the San Jose Better Bureau. Little will come of it, BUT ebay MUST file a written response.

-- Rep. Waxman has the ability to hold public hearings on the conduct of a business or industry. He has the power to subpoena executives past and present, past and present rank and file employees, and records. Consider the possibilities :-)

8. San Jose Better Business Bureau
1112 S. Bascom Ave.
San Jose, CA 95128
Phone: [phone] [phone]

9. Ebay operates in all 50 states. Therefore sending copies of complaints or filing directly with your state's attorney general's office will make a difference if they receive enough complaints. Your can find your attorney general and consumer protection
information by using a search engine using these keywords (Your state) Attorney General Consumer Protection.

Please post this information on every relevant website and blog -- especially TV news, newspaper, financial, and business media blogs and websites. This information should be posted in hundreds of location on a daily basis for maximum and persistent exposure.

Jul 27 12:40 AM

[Philip Cohen:]

<b>Shill Bidding on eBay: a Case Study</b>

For eBay “watchers”, a detailed case study of the crime of “shill” bidding and the abuse of eBay’s proxy bidding system—all exacerbated by eBay’s introduction of “hidden bidders”—plus a detailed general criticism of eBay’s “clunky” auction platform, and policies, at

<url>www.auctionbytes.com/f...;/url>

A synopsis thereof:

 very little of the auction system security, that eBay claims to offer buyers, exists in fact;

 contrary to their claims, it can be demonstrated that eBay has no “proactive” nor “sophisticated” system in place for the detection of undisclosed vendor (“shill”) bidding, and indeed eBay appears to do nothing about such criminal activity except as a reaction to users’ reports of suspicious bidding activity;

 eBay appears to have no effective matter-of-course verification of users: unscrupulous users can apparently have as many user IDs as they may have email addresses;

 many of eBay’s “rules”, concerning the retraction of bids, cancellation of auctions, etc, are nominal only and are no bar to the machinations of the unscrupulous seller;

 as a result, eBay’s “proxy” bidding system is so open to abuse by such unscrupulous sellers that to use it, as eBay intends it to be used, can be an invitation to pay your maximum;

 by the lack of any effectual system to proactively detect shill bidding, eBay has ever effectively, and knowingly, “aided and abetted” unscrupulous shill-bidding sellers to defraud naïve buyers;

 the masking of bidding IDs with non-unique, absolutely anonymous aliases serves no purpose other than to obscure all but the most blatant of shill bidding, and defeats any attempt at comprehensive analysis of individual bidding patterns to expose such activity;

 the quarterly changing of even these non-unique, absolutely anonymous, bidding aliases serves <i>absolutely<... no other purpose than to stop even experienced eBay users from attempting to manually track suspicious bidding activity over time;

 the anonymous, individual bidder Bid History Details pages, supposedly supplied to offset the absolute masking of bidding IDs, although better than nothing, usually present an ambiguous view and, in such circumstances, are of dubious value;

 anyone naïve enough to “nibble” bid on a seller-elected “private” auction (ie, “User ID kept private”), on the balance of probability, is going to be defrauded;

 when suspected fraud <i>is</i> reported, and is found by eBay to be proved to their satisfaction, eBay will conceal that fact from the victim of the fraud; this then is the concealing of a crime after the fact, surely, a crime in itself;

 eBay will never acknowledge to a victim that a fraud has been perpetrated, nor indeed will eBay acknowledge that such fraud is even a problem on eBay auctions; eBay therefore sees no reason to provide any mechanism to aid in the recovery of any monies so defrauded;

 if eBay did have any proactive and truly sophisticated system in place for the detection and control of shill bidding, we would not now be having this debate; and

 for those buyers (and honest sellers) who embrace eBay believing that eBay acts as an “honest broker” between buyer and seller, I can only say that you may as well believe that there are fairies at the bottom of your garden too; and

 the ugliest aspect of this matter is that we would quite rightly be upset if our local auctioneer, from whom we were buying, was found to be facilitating and concealing such criminal activity—and here is eBay, knowingly, doing this to the whole world!

Aug 13 07:43 AM