Sell-Side Reaction to eBay Express -- Scott Devitt (EBAY)

| About: eBay Inc. (EBAY)
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scott devittFrom Stifel Nicolaus analyst Scott Devitt's note to clients yesterday on the launch of eBay (NASDAQ:EBAY) Express:

eBay Express Launches

• Late Friday evening, eBay Inc. launched a preview of eBay Express at www.ebayexpress.com. The platform includes all fixed price and eBay Stores merchandise from merchants with over 100 feedback rating of which 98% must be positive. Also, the item must include a photo, item condition, and shipping costs. Finally, the merchant must have a PayPal Premier or Business account.

• Some interesting points we have found while testing the site include – (1) the search technology is more sophisticated than core eBay in terms of the ability to understand search queries (relevancy); (2) customers can pay with a credit card outside of PayPal although it seems the economics to eBay are identical to a credit card funded PayPal payment; (3) shopping cart bundling cross-merchant functionality works well; (4) shipping prices are clearly displayed beside price; it would be nice to have estimated shipping lead times and or logistic provider; (5) no shipping concessions cross-merchant and shipping discounts on multiple item purchases with one merchant are still at merchant discretion; (6) search buttons run across top of site rather than eBay core along left-hand side; (7) 11.6 million items for sale on Express; (8) customer service functionality via both live chat and e-mail, live chat is new; and (9) Express is not advertised on the eBay.com domain.

• A quick review of the eBay fee structure includes a listing fee at average ASP of $1.20 in auctions and $0.02 in an eBay Store, while closure fees in auctions run $1.76 compared to eBay Stores coming in around $2.75. All in, the average $40 ASP item in auction would cost $2.96 while it would cost $2.77 in a Store transaction (eBay Express). BIN on an auction would cost another $0.20 and as we understand fixed price non-Store listings default to the auction fee structure. To put this in plain English, an eBay Store sale costs about 94% of what an auction or fixed price listing costs to a merchant. Also, Store inventory turns much less quickly than auctions but in our experience yields a higher ASP on a like item.

• We like the new Express offering and we think buyers searching for fixed price merchandise will gravitate to the new platform over time. The greatest takeaway that we have at this juncture in the rollout is that we find Express to be an interesting way for eBay to segment the marketplace between auction and non-auction goods. Many of the clutter issues with the site have been related to the growth of fixed price listings over time. Fixed price offerings began with Buy It Now, then fixed price listings, and then eBay store listings. All the while, ecommerce outside the eBay marketplace has become more sophisticated making it that much more important that eBay execute on its fixed price, traditional commerce format offerings. We believe if Express can allow for a true segmentation of variable vs. fixed price inventory without disrupting the marketplace as the Stores integration did in 1Q06, it will be deemed a success.

• eBay shares are down 13% since the company reported in-line results, in a quarter in which we expected modest outperformance and higher guidance. All else being equal, we would be buyers at current levels as this well-positioned global franchise now trades for 22x our estimate of 2007 unlevered free cash flow (enterprise value – to – unlevered free cash flow, inclusive of the non-excess tax benefit of stock options). In the just completed quarter, eBay grew its business on an organic basis at 30% with GMV growth (ex-Motors) on a constant currency basis of 24% and PayPal constant currency at 47%. As we have stated previously, we believe eBay shares will be choppy throughout the second quarter, with the launch of eBay Express, the rollback impacts, the international story, and analyst day, being the drivers of share moves. As an investment in a business, we view the eBay franchise as a dominant global brand with two well-protected core businesses, eBay and PayPal, and another building nicely in Skype. In our view, the days of unlimited stock upside and earnings outperformance are behind the company but we think the merits of the investment still exist for long-term investors. In our view, over the next three-to-five years we believe earnings for eBay will grow at a faster rate than its market valuation (a belief we have with all large-cap Internet names), allowing for some amount of multiple compression, and we continue to be opportunistic buyers within this framework.

• At the present time, we have few ideas within our coverage universe and have gravitated to the largest franchise names in a time when we find industry aggregate growth rates to be at the beginning of longer-term decline. The industry continues to grow globally at above 30% and new, innovative business will likely come along in the sector with rates of growth much higher than the industry growth rate. However, it is noteworthy that Google will spend more than $1.5 billion in capital expenditures in 2006, followed by Yahoo! at $600 million, eBay at $450 million, and Amazon in the mid-$200 million area. We feel the capital being deployed by larger companies in the sector is going to make it difficult for smaller players to be competitive and, in turn, improve the competitive position of the leadership. We would be buyers of eBay, Google (Buy, $437.10), and Yahoo! (Buy, $32.89) at current levels and would begin to gain an interest in Amazon (Hold, $36.03) at levels 10%-15% below Friday's close, all else being equal.