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eBay's (NASDAQ:EBAY) size and business model enables them to generate considerable profits. Over the past four years, eBay has generated 59% growth in FcF each year, which eBay has used to make acquisitions, most notably Skype. eBay's acquisition and significant investment in international operations, especially in China, and tech, have led to a notable margin compression in 06.

As of eBay's last Q, they had 211.9 million confirmed registered users, up from 168.1 million a year ago and 79.8 million active users vs 68 million last year, which accounted for 488.3 million non-store listings vs 407 million last year (05).

Revenue from Marketplaces grew 22.3% to $1.05 billion due to good performance in key geographies and strong results from Revenue from PayPal grew 41.7% to $350 million due to the increased penetration on eBay and growth witnessed in its Merchant Services business.

eBay expects to generate net sales in the range of $5.87 billion to $5.93 billion in 06, up about 28%-30% from 05, including $1.62 billion to $1.68 billion in Q4 FY06. The company anticipates EPS of $0.75 to $0.76 in FY06. The company also expects that FY07 organic consolidated net sales growth would be in the range of 17.0% to 21.0%.

According to Street estimates, weekly post-holiday sales were up 44%, (thanks to the gift season) and sellers listed 16.6 million non-store items on the US site last week. Listings were also aided by fixed price promotion.

Investors need to understand that even though eBay is a well established leader in the Internet segment with a business model that has low costs and a stellar balance sheet, the web is a rapidly changing environment and eBay faces notable competition. This has led eBay to make acquisitions which have cost a lot more, at least the way Wall St. views it, than they should have.

Hence, management's strategic decisions have come under scrutiny and exposed investors to risks of declining conversion rates, slower than-expected listings growth and further compression of operating margins (eBay’s OM contracted 886 basis points to 23.4% in 3rd Q of 06 due to the inclusion of the Skype business, investment in site operations capacity and high cost for consumer protection programs).

EBAY 1-yr chart


Source: Can eBay Stay Ahead?