Gmarket: Korea's eBay Has Strong Growth

The sector of companies focused on the online marketplace appear to be doing a great job as a whole in establishing an industry that I hope, for at least my own joy of bargain hunting, will be around for a long time to come.

I am certainly not the only investor who has given in to this belief either. I can’t find a single publicly traded online marketplace that has a trailing value below a treasury bill, which means people are willing to pay to take on risk in the industry in return for the expectation of growth.

The confusion in dealing with these online-foundation based marketplaces however, is figuring out how much the risk is really worth. For most companies, that risk is being sold at a very high price. I don’t deny that those companies may live up to, or even exceed, their current value and I hope that they do, but with such high multiples I’d rather let someone else have the heart attack I’d possibly face while owning them.

At the same time, I do believe that the growth is real, so I am glad to see that people are selling off their shares of Gmarket (GMKT) at a minimal premium (less than 30 times trailing earnings) in comparison to the rest of the sector, while at the same time Gmarket is successfully producing and expanding its income.

The big time global online auction houses, eBay (EBAY) and MercadoLibre (MELI) are currently trading at about 100 and 200 times their trailing earnings, respectively. For those of you who don’t believe in looking at multiples, know that they are derived from real figures and you can’t ignore that those statistics could be shattered overnight as they have in the past. But Gmarket is not really an auction house like eBay or MELI, and not nearly as diversified, so you can’t really compare their growth side by side.

For the computer illiterate, Gmarket is a little more like a South Korean Amazon (AMZN), simply connecting sellers and buyers. But Gmarket does not have the magnitude and is not as diversified as Amazon either (which is trading over 60 times earnings) so even they can’t be compared completely. I look at those companies as a start, though, and I have been buying Gmarket on the way down because I think it will keep up with the industry as it has been.

All four of the companies I mentioned in the last paragraph have double digit earnings and revenue growth. Amazon and MercadoLibre both even have triple-digit earnings growth. But those numbers can be deceiving and expected well in advance.

Amazon has more than 60 times the revenue of Gmarket, but barely distributes more than 10 times the income to the common, which goes to show that in a similar business model Gmarket is operating at a really nice margin. What adds more sauce to the mix is that Amazon has a half of a decade more experience than Gmarket and it is still trailing in the margin race.

Looking at MercadoLibre, the multiple appears to be a factor of the huge market available to their service (South America), but it is not nearly as established as the other three players. MELI’s revenue is still only eight figures and its earnings are only seven.

The next factor that I am looking at in all four of the companies is cash and debt. They all have a lot of cash, which I am a big fan of for the current market, but Gmarket is the only one with absolutely no debt. Debt is expensive and cash goes a long way right now in tech, so that position could give Gmarket a significant leg up to make big moves.

These comparisons could go on forever, but there are a few factors about Gmarket that make ownership even more enticing to me. I don't recall the source, but I read that Yahoo (YHOO) has a decent chunk of equity in the company and Interpark, a South Korean mall operator which probably is not the right suitor for such a large stake, also does.

And, to add to my non-source-based information, I recall reading that Interpark would not sell right now because the market has it undervalued. Gmarket's enterprise value is less that $ 700 million right now. I do not intend to spread any false rumors though, so if I am incorrect about either of those tidbits please correct me immediately.

On top of that, Gmarket is growing so fast in Korea and it is planning on making a move into Japan in the second half of the year. It looks like Gmarket might be priced where it is in part because investors have already factored in a failure in the move to Japan.

GMarket is the most heavily growth-based stock that I have in my personally managed portfolio. I bought a small stake above $22 because I thought that was a good price at around 40 times earnings. It is the same company this week as it was a few months ago, and when I saw the price hit $19, I felt like I had to use the 15% off recession sale coupon. If the price does not get to where I would like it soon, I am comfortable holding until I can get some tax benefits for doing so, but I don’t expect to buy more unless it goes below $16.

Disclosure: I own shares of GMKT.