eBay Overview

March 10th, 2005 - Copyright by Morris Rosenthal - - contact info

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Trading Notes

Copyright 2005 by Morris Rosenthal

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Notes on trading EBAY stock for investing in my SEP

eBay scares the heck out of me as a stock. A company with what should be a pretty mature business model by this point trading at a P/E of 70 times earnings? Shares hit their all-time high high of almost $60 just a couple months ago, and have been dropping pretty steadily since then, currently just under $40. While eBay has tremendous name recognition and a huge user base, I'm suspicious that the entry barrier for competitors is relatively low, which should limit eBay's pricing power going forward. If they want to raise their fees, buyers and sellers will probably go elsewhere. Even if they don't raise their fees, it's possible that auction and consumer-to-consumer sales features on sites like Amazon, Yahoo, and any other Internet portal will erode their market share. There's also an overhanging threat of internet fraud hurting their PayPal subsidiary, and even eBay itself. eBay's current market cap of a hair on $60 billion just seems like a lot of money for an auction site. but that's why I have them in my software category. The eBay franchise is their website and the back-end custom software, along with their years of experience in keeping it all safe. Insiders have unloaded a significant number of shares over the past six months, if I did my math right, they've divested themselves of over 5% of all the outstanding shares.

eBay does have some very positive things going for them, primarily their community of users. It's critical for buyers and sellers to have confidence that their transactions will be honored, and that's where eBay's long history has weight. A community members use eBay, they build up personal histories that, to regular eBay users, are the gold standard for expected performance in the other party.Over $18 billion dollars changed hands on the U.S. eBay site in 2004, and total revenue to eBay from all sources was about $3.3 billion. While this amounted to over $1.1 billion more in revenue than 2003, it was a sharp drop off in revenue growth, from the previous four years. Their U.S. marketplace revenue grew 31% over 2003, while 2003 U.S. revenue had grown 43% over 2002. International marketplace revenue grew 76% from 2003 to 2004, compare with 121% in 2002 to 2003. Payments revenue which grew 360% in 2002/2003 only grew 59% in 2003/2004. Even growth in advertising revenue dropped by nearly 50% in the 2003 to 2004 period. The overall impression is of slowing growth and possibly of market saturation. If the majority of people in countries with significant economic activity are already being served by eBay or other online transactional sites, where is future growth to come from.

I may buy eBay stock on news at some point as my current trading strategy is entirely speculative, but this isn't a stock I would want to lock in a safety deposit box for five years and count on for kids college education.

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