EBay Vying for Holiday Sales
The revolutionary internet marketplace EBay (EBAY) has made significant strides in tightening up the sales process in order to inspire trust between buyers and sellers. There is a vocal contingent of EBay users who have at one time been burned by a fraudulent transaction on the site, and while the site has in the past attempted to ensure the integrity of sales on the site, the company has taken it to the next level recently.
Buyers are now eligible for a full refund for fraudulent sales; EBay lifted the cap of $200 on transactions or $2,000 for highly rated users. Sellers who accept PayPal (EBay’s wholly-owned ecommerce processing subsidiary) get unlimited protection against reversed charges. Currently, 75% of EBay transactions are processed through PayPal, and conversely 60% of all transactions processed on PayPal are via EBay. EBay is also adding more incentives for fixed-price sales as opposed to auctions. They have improved their searching technology making it easier than ever to match up buyers and sellers with the products they desire. Furthermore, EBay will reduce fees by 20% to its highest rated sellers as well. These are just some of the new measures that EBay is hoping will restore trust between buyers and sellers and in the process bring more successful transactions.
EBay has become a major player in internet retail, and these improvements—which will be implemented by the holiday shopping season—will put added pressure on web rivals Amazon and Craigslist. However, EBay is competing with more than just online retailers; EBay is second to only Wal-Mart in the amount of retail business that it conducts. That is an amazing volume of business to conduct with much lower overhead than Wal-Mart or other “bricks and mortar” retailers which necessitate real estate, employees, et al. Clearly, EBay will not be able to bring in the kind of revenue of a Wal-Mart or Target, but they still take a cut of every sale with much less overhead cost. There are 1.3 million people who make a living either buying or selling items on EBay, and the site has 84 million active users. These users are effectively unpaid employees who generate revenue while costing EBay nothing.
As these recent measures demonstrate, EBay is not taking its users for granted and they are trying to address their concerns that have cause growth to slow. Ockham Research is reaffirming our Strong Buy for EBAY, as the company is demonstrably undervalued compared to historical norms. For example, EBay’s price-to-sales ratio is currently 4.4 times, but the stock has traditionally traded in the range of 8.7-17.5 times revenue. Likewise EBay’s price-to-cash flow has fluctuated between 32.3 and 62, and right now it is trading at a multiple of 14.7 times. For EBay to be selling at the low end of these historically normal valuation ranges would require the stock to be priced around $66 per share given current levels of sales and cash flow.
Furthermore, value investors should not be frightened by the P/E multiple in the low 90’s, this measure reflects an impairment charge from 3Q07 of nearly $1 billion. The P/E will give a much more accurate reflection of the stock’s valuation when that charge is replaced by 3Q08 results, and it will likely be in the low 20’s range. We think that EBay is on the correct path to restoring trust in its efficient marketplace, and we think this stock’s valuation is quite compelling. Bargain hunters will rejoice the new security measures to protect them in the ever evolving online marketplace, but perhaps the biggest bargain available is EBay itself.
Ockham Research Staff @ June 20, 2008
