I remember using eBay a few times to buy and sell stuff about seven or eight years ago. Since then, I have barely even glanced at it, not the site, not the stock. That was probably a mistake, especially last year.
What I knew about eBay EBAY �was that Amazon (AMZN) was competing with them, as were thousands of other sites with low-pricing models that disrupted eBay's auction-based system. I also knew about Paypal as a user, but it never seemed like enough to really spend much time analyzing the parent company.
My interest in the company was stoked a few weeks ago, though, when I was asked by a client how to sell some �teen numbered license plates from California, Nevada and Wisconsin that he had kept active in his garage for decades. My first thought was an auction house, but almost simultaneously I also thought of eBay.
"We just throw some decisions into the 'too hard' file and go onto others."
�Charlie Munger
The process of looking into how to use eBay effectively quickly turned into an analysis of eBay the company and eBay the stock. In short, what I found was an evolved, interesting company, but not necessarily a stock to buy.
eBay does have the extremely successful Paypal attached to it, a generally successful sales model, a dynamite balance sheet and even an intriguing potential catalyst as the baby boomers retire, which I haven't heard anybody talk about. Ultimately, though, the company appears fairly valued, and as I'll go into a little later, seems like it might be best off getting involved in a major strategic transaction.
Clearly, the company is still powerful and now has major inroads into foreign markets. However, their commissions on products sold is stagnant to slowly drifting down, and gaining market share is an upstream swim against serious competition. Their auction business has slowed, and there is also the matter of Wiley v. Kirtsaeng.
eBay's auction business does have some very interesting revival potential in my opinion. Given that three quarters of baby boomers are nowhere near being ready to retire financially, it seems to me that they will be selling stuff to survive. Whether it is reselling antiques that they inherit or trading goods as a side business, eBay seems like the place for that. I have already seen an eBay store pop up on the second busiest intersection in Wisconsin. That can't be a coincidence.
Right now, Paypal is the most important profit driver for the company. It accounts for about 44% of eBay's revenue. Impressively, Paypal is used in about a quarter of all online transactions. That is huge, but other payment methods are evolving to compete, and it seems to me that market share is near its peak.
Paypal's arrangement with Discover is a good one, but not special. eBay's expansion into international markets should give Paypal the ability to hold its market share and grow nominally. Overall, Paypal, which I do use for business and personal purposes, is a strong and interesting piece, even if there are threats to its dominance.
As for valuation, eBay stock is not particularly attractive to me at 20 times earnings, but neither is it particularly unattractive with a growth rate in the teens. With its huge cash balance of over $10 billion the company could engage in share buybacks, special dividends or a major transaction.
Here is where I think eBay gets really interesting. What could this company be if they just got in front of more eyeballs by better getting into search and crashing the social media party?
As I looked deeper into eBay's model, the thought that the company would be better off engaging in a big deal became very apparent in my opinion. eBay is facing serious emerging competition. So, while they have a great position currently, the moat they have had around their business could be breached. eBay needs a partner, or maybe two.
That, of course, turns my eyes to who would be a good partner. There are three tech companies and a few major retailers that come to mind. Let's take a quick look at the tech companies.
The two most obvious companies that might like to dance with eBay in a more intimate way are Facebook (FB) and Google (GOOG).
Facebook's social reach and desire to engage more with our pocketbooks would make them a logical merger candidate. Not only would there be instant ability to market to a billion people more directly, the potential development of the platform would be immense. Also, bringing some of eBay's management to the merged company would probably be a benefit to Facebook.
Google has the ability to buy eBay outright. If Google truly wants to create its own powerful store presence rather than being an aggregator of deals around the web, buying eBay could accomplish that. I don't see it though. In the long run, a Google acquisition seems to have limited upside for the price.
The tech deal that intrigues me though is a possible purchase of Yahoo (YHOO) by eBay. Yahoo's new search is powerful, and frankly cool, but without a nudge, might never live up to its potential. Yahoo's homepage is still very popular � it's my homepage so it must be (haha) � and could be a fantastic way to integrate the businesses. Adding a more integrated eBay module and better developing Yahoo's social reach using the email system as the starting point, could provide incredible development opportunity for a company with broader scope.
Among retail opportunities, would Sears Holdings (SHLD) consider selling off the failing KMart stores to eBay? I can't see why not. Without major remodeling, it appears to me that KMart is doomed to shutter. It could make more sense to Eddie Lambert to sell the asset sooner rather than later. An outright strategic acquisition of KMart would give eBay an instant bricks-and-mortar presence nationally which could be powerful. eBay could develop the stores as a high-tech combination auction house, consignment space and mall model by renting out mini-eBay stores.
Back to the stock. Despite its great 2012, I am not a buyer of eBay shares at this point. I missed that move, and that's all right. There might be another opportunity later. And if there isn't with eBay, I'll move on to some other opportunity.
Too many investors worry about "missing it" and make bad decisions in an effort to try to catch up. We might be on the front end of that happening in the broader stock market as stock inflows have picked up at the retail level.
If eBay stock falls back into the $40s again on some correlated market event, possibly due to some of the things identified in my year-opening article, I would probably look for an entry, but for now, I'm staying away. It's just too hard to know what the future holds for eBay at the moment.
Kirk Spano is the owner of Bluemound Asset Management, LLC and publisher of the American Resource Boom Letter. Neither Kirk nor clients hold any positions in companies mentioned. Opinions subject to change at any time without notice. If any of the deals noted above come to pass, I would like an invitation to the champagne party.
