Barron's lead article this weekend was a detailed bull case by Eric Savitz for buying eBay's stock (ticker: EBAY). Key points and quick comments:
eBay has expanded beyond the auction market into:
- fixed-price transactions via "Buy-It-Now";
- payment processing via the acquisition of PayPal;
- online classifieds via eBay's investment in Craigslist and its local classifieds site Kijiji;
- rental listings via acquisition of Rent.com;
- comparison shopping via last week's announced acquisition of Shopping.com.
Growth potential and concerns:
- Despite slowing growth, eBay's revenues still grew 36% in Q1, with GAAP net income up 28%.
- US revenues grew only 19%, ex-PayPal.
- Morgan Stanley analyst Mary Meeker estimates that auction listings are up 23% year over year so far in Q2, and believes that revenue growth should increase next year.
- eBay CFO Rajiv Dutta argues that the US market will remain the company's largest growth contributor for years, due to low current ecommerce penetration (5% versus catalog sales of 10-12%). According to Dutta, of the 50,000 merchandise categories in which eBay participates, it accounts for no more than 6-7% of overall trade in any single category.
- Shopping.com should strengthen eBay's position in selling current-run, in-season merchandise, in contrast to collectibles, end-of-run and close-outs that are best suited to the auction model. That will help eBay reach "the 40% of online shoppers who have yet to transact on eBay".
- Growth could be juiced by improved search, improved shopper trust, integration of minimum price for auto auctions in Germany.
- Significant growth engines: (1) China. Bear Stearns analyst Bob Peck estimates there are 300 million middle-class Chinese, a number that exceeds the entire US population. Mary Meeker thinks eBay's international businesses could benefit by it global platform, which would enable cross-border transactions.
- Significant growth engines: (2) Paypal. Paypal has more accounts than American Express and Discover, charges lower fees than credit cards, and has a shot at being adopted for a large percentage of online transactions.
Short term negatives will disappear:
- CEO Meg Witman decided not to accept the position of CEO of Disney;
- Growth will re-accelerate;
- Investor nervousness at China expansion, aggessive roll-out of Paypal and acquisition of Shopping.com will dissopate.
- eBay's stock has fallen about 35% since the end of last year.
- Currently trades at 38 times 2006 consensus EPS estimate of $1 per share.
- Legg Mason Capital Management analyst Randy Befumo: "Our view is that businesses with sustainable growth, even low-double-digit growth over long periods of time, can appear overvalued in the near term, then actually turn out to be quite cheap."
- Goldman analyst Antony Noto estimates that eBay can grow 25% annually through 2009. Stock could hit $46, or about 45x his estimate of 2006 profits.
- "...The stock looks as cheap as anything you'll find on eBay."
- Valuation argument seems tenuous; at least requires further substantiation.
- Key question: given that eBay is using its strong cash flow for acquisitions, how effective is it at them? Is it overpaying for acquisitions, or getting bargains?
- "35% down since end of December"? Internet stocks ran up dramatically in December, so this isn't a meaningful metric. See chart below.
- Note the analysis of eBay's competitive position in China on The China Stock Blog.
- What is the future profitability of the online classifieds business? Most items on Craigslist are posted for free.
- Competitive environment: (1) Search engines and providers of pay-per-click ads offer alternative for merchants with their own web sites; (2) Amazon.com and Yahoo offer packaged online stores to merchants. Not clear what competitive dynamics are for eBay.
- Is there are natural limit to eBay's growth? Om Malik thinks there is.
Full disclosure: at the time of writing I'm long SHOP.
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