Seeking Alpha
Research analyst, long/short equity, tech
Profile| Send Message| ()  
Based on our $42 price estimate for eBay (EBAY), we believe there is significant upside to the $24 market price for eBay. eBay makes money primarily by taking a cut of the sales price of items that are sold through its marketplaces portals (e.g. eBay.com).

The company recently announced earnings results in which it indicated that its cut of merchandise sold, also known as the transaction take rate, was 7.8% in 2009,

below the 7.9% we were anticipating.

eBay's marketplaces business is the most valuable part of the company, constituting 54% of eBay's stock value. The transaction take rate is a crucial factor that determines how much money eBay makes.

Show eBay Transaction Take Rate Chart

Take Rate Sacrificed for Higher Overall Revenues

eBay's take rate for the first three quarters of 2009 was 7.9-8%; however the rate dipped to 7.5%. This dip was driven in part by new seller incentives that reward sellers for providing the best service to buyers. In return for improved customer service, sellers pay a lower transaction rate to eBay, which means that eBay's effective take rate of sales drops.

Although eBay is sacrificing a few fractions of a percent on its take rate, the goal is to drive up overall revenues by encouraging more buyers to transact through eBay. This could lead to an improvement in eBay's listings-to-sales conversion rate, or in other words, the percentage of all listed merchandise that is sold.

You can modify the eBay Transaction Take Rate forecast and the Listing-to-Sales Conversion Rate to see how eBay's business could be impacted if the seller incentives lead to even lower take rates and better conversions.

Disclosure: No positions

Source: Still Large Upside on eBay