This is an analysis by Clay, taking his first public shot at determining for us whether a business is wonderfful and on sale. His focus in this article is EBAY. My notes follow at the end:
I've been an eBay member since 1999. I know the ins and outs of how eBay and PayPal function both as a buyer and a seller. I’ve bought or sold everything from motorcycles, auto parts, vintage vacuum tubes, curly maple lumber, camping supplies, clothing, jewelry to high-end guitars, books and music. It's a straight-forward concept. Retailers/individuals provide the products, eBay and Paypal provide the means to sell those products worldwide. (I've sold to Israel, Japan, UK, Spain etc myself) This one point illustrates a large difference from competitor Amazon. eBay doesn't provide the product, so if it doesn't sell they still make money on the listing, whereas Amazon is at the mercy of inventory. PayPal may have been beholden to eBay as an income source at one time but that's not the case currently. With new retail partners, new mobile card reading hardware and partnership with Discover Paypal looks to expand its TAM far and wide.
eBay vs. Amazon: Amazon sells retail, supplying 60% of the actual products sold, while eBay provides exactly zero of the products sold on its website(s). This means Amazon pays to purchase, ship and warehouse items. Amazon may also have to eat a loss if the product doesn't sell well. eBay on the other hand makes money regardless of actual sales completed. eBay collects listing fees, insertion fees, photo fees, final value fees etc. and if it doesn't sell? They collect more when the seller relists the item....and if the item DOES sell? Well, They take their fees and/or a percentage (depending on listing/category) and more fees if you use PayPal to complete the transaction EBay basically has nothing to lose! They get paid through two different cash flows if a sale is facilitated, and one source of cash if the item doesn't sell. If the merchandise gets re-listed or has to be sold at a loss eBay takes none of the loss, yet realizes cash flow every time listed. With a gross 75% and net 34% profit margin compared with Amazon's 26%/-.015% (according to yahoo finance). Its a glaringly different business model. Im not saying there isnt overlap, just that the way they go about things are very different. Amazon doesn't carry as many items as eBay. A simple search for "Jeep wheel" shows 25,000 more entries on eBay. Also, none of the vintage /used/niche/collectible and one of a kind jewelry, items or art work that sell on eBay are on Amazon. Want to find a vintage leather jacket or vintage Levi's ? How about some authentic native american turquoise? 1957 Cadillac brake lens? vintage Stratocaster guitar? you wont find them on Amazon. Amazon doesn't beat eBay on prices for new merchandise either. I can find most any book on eBay for the same or less than Amazon, Jerry Can for potable water? Lowest price is from Northern Tool ... selling on eBay. Lots of major retailers use eBay to increase sales or clear dead stock as well.
eBay vs. Craigslist: Craigslist is basically a "non-profit" and eBay actually owns 28.4%. Thats right, eBay owns part of craigslist and competes directly with its own service "eBay classifieds"(formerly Kijiji).
Paypal: One might think that PayPal only makes money on eBay transactions. With only $50 billion of PayPal's $150 billion in facilitated transaction revenues coming from eBay and the rest from other web or POS sales. Its a sizeable portion but not the entirety or even majority by any means. $3.6 billion of PayPal's $5.5 billion in revenue comes from non-eBay marketplaces. PayPal already has 123 million active users (eBay has 112 million) and looks to expand by leveraging partnerships with 23 major retailers throughout the U.S. 18,000 physical stores now let customers shop with PayPal in-store. The chains that accept this service include Advance Auto Parts, The Home Depot, Ace Hardware, Office Depot, Famous Footwear, Dollar General, Mapco Express, RadioShack, Spartan Stores, Abercrombie & Fitch, Aeropostale, American Eagle Outfitters, Barnes & Noble, Foot Locker, Guitar Center, Jamba Juice, JC Penney, Jos. A. Bank Clothiers, Nine West, Rooms To Go, Tiger Direct, and Toys "R" Us. It's partnership with Discover will add 7 million more locations. PayPal provides a multi-source (cash from multiple savings or checking accounts and credit cards) way to pay without sharing your credit card or bank info, an increasingly important service in the age of phishing scams and hacked credit card accounts. With architectural touch screen technology that would give Steve Jobs a chubby already being implemented in 4 major cities. eBay inc is implementing new, scaleable ways for customers and retailers to interact, while creating a database that can be used to increase sales/ control inventory, and increase sell through based on customer behavior.
GSI/EBay enterprise: GSI (Global Sports Inc) was started by Mark Rubin in 1999 as an e commerce platform to help sporting goods retailers, with a net revenue of $5.5million. By 2010 it had expanded to $1.3 Billion by branching into a fulfillment and e commerce management company for everyone from Toys R Us to the NFL, NBA, NHL to Ace Hardware. Covering all kinds of goods from all kinds of major brands and retailers. Quite an amazing roster --http://www.ebayenterprise.com/clients/. In 2011 GSI commerce was acquired by eBay inc. Also in 2011 "Ebay Inc. completed the divestiture of 100 percent of GSI's licensed sports merchandise business and 70 percent of ShopRunner and Rue La La to a newly formed holding company led by GSI founder and CEO Michael Rubin." This is where the rubber meets the road for any Amazon vs. EBay discussion in my opinion. This is where the fulfillment centers come into play and Shop Runner vs. Amazon Prime come into play. This is the overlap I can see.
Is it durable? I think the concept of auctioning/wholesaling is as old as haggling and will be with the human race for a long time to come. Same thing with paying for those items (Paypal) or trying to get more sales/higher profit margins (ebay enterprise née GSI Commerce)
Brand? Yes, I believe eBay, PayPal and GSI now eBay enterprise not only have brand recognition (In the case of GSI within the industry) they have earned the trust of millions worldwide.
Switching? Yes, with both PayPal and eBay once you're using their website/software and they are embedded in your business it's a hassle to switch.
Toll? eBay are billed as the Largest online marketplace. Auctions tend to bring more money for items than outright sales, so the attraction for sellers who have high dollar or unique items is intense, and Craigslist or Amazon don't offer that. PayPal has a "symbiotic" toll moat with eBay since all the auctions allow one to use Paypal. GSI commerce offers fulfillment and ecommerce website/inventory management. its fulfilment centers are something only companies like Amazon and Walmart can manage. They've been at fulfillment and ecommerce since 1999.
Secret Moat? Well they do have new patented "shopping glass" currently in use in malls in 4 major cities*. Not sure if I can call things "secrets" like the PayPal mobile app, "Beacon" hands free Bluetooth payment system, or the "PayPal Here" mobile phone card reader (direct competitor to "Square"), but they are things that cost lots of R&D money to replicate.
"We do not wish to join with managers who lack admirable qualities, no matter how attractive the prospects of their business. We've never succeeded in making a good deal with a bad person"- Warren Buffett
Pierre Omidyar is Chairman of the board, founder and a director. Born in France. He wrote the code that eventually became eBay in 1995. By 1998 when the company came public he was a billionaire. I think money brings out people's REAL personalities. When Pierre and his wife became insanely wealthy they showed what was inside by becoming philanthropists! I'll let them speak for themselves here:
"Our backgrounds are in technology and science. We are parents, entrepreneurs, humanitarians, citizens, thinkers, doers and philanthropists. We wear all of these hats at different times, and many simultaneously. We believe that people are essentially good—people can be trusted, and generally have good intentions. This was a key belief in the creation of eBay in 1995, and has remained an integral part of our lives ever since. We are committed to using our time, energy, and resources for the public good; it’s our passion, and a challenge as great and rewarding as any we’ve experienced. We focus on the efforts we believe in most, and the places where we have distinctive contributions to offer. By cultivating the inherent capabilities that exist within each individual, we hope to have a positive impact on people and communities, promote human dignity, and alleviate suffering. We believe in the power of people. In their creativity. In their ability to take action and bring about extraordinary change. In their desire to do good for themselves and one another. That belief in humanity is what drives us and unites all of our efforts."--from the Omidyar Network site
"As a first generation American who came to this country when I was still young, I continue to be inspired by the founding vision of the American republic and believe that through innovation, dialogue, and bipartisan reform we can take steps that will help us realize that vision." -from his Democracy group web page.
He's got a BAG, his philanthropy is as impressive as Buffett and Gates and has signed the Giving Pledge. Oh, and his salary is $19,916.... Sounds pretty darn good to me.
John J. Donahoe, CEO, President, Directector. BA Economics Dartmouth, magna cum laude, MBA Stanford Graduate school of business. Salary of $970,353 with total annual compensation of $3,975,119. A former Schlitz Beer employee, and fellow Teamster he went on to join Bain & Co. inc in 1982. Served as head of San Francisco office for 7 years. He has been a member of operating and nominating committees. He was named Worldwide Managing Director from 1999 to March 1, 2006 at Bain. Mr. Donahoe oversaw Bain's 29 offices and 3,000 employees worldwide. He also served clients in telecommunications, airlines, aerospace, and financial services industries. Prior to that he worked for Rolm Corp. and Salomon Bros. CEO and president of Ebay Inc since March 2008. President of Auction Business Unit since Feb. '05 and has been a director at Intel since March '09. Vice Chairman of the Advisory Council at Stanford Graduate School of Business, Board of trustees of Dartmouth College and Sacred Heart Schools. Served as trustee of Bridgespan Group and other charitable organizations.
SUMMARY: I see eBay as a robust platform that does well even in tough times, Paypal as an established and growing player in Omni channel retail with eBay as a strong cash flow Berky to help it expand on its already impressive list of brands/retailers it works with. GSI/eBay enterprise itself has an impressive list of brands it does work for.
"Since the company’s founding, we have maintained that the value that eBay Inc. creates for its stockholders isn’t strictly financial. In 2012, we articulated a strategy to focus our social innovation efforts around three core areas: creating economic opportunity, powering charitable giving and enabling greener forms of commerce. For example, we announced and began construction on the first-ever data center to use renewable energy as its primary power source. And through PayPal, we processed more than $3.6 billion in funds in 2012 for charitable organizations."-2012 shareholders letter
VALUATION (MARGIN OF SAFETY)
I saw the chart of eBay looking like a year long sideways channel from 50 to as high as 58...just a bit over Town valuation default settings of $57 Sticker based on $2 EPS and 14% future GR. [The price today closed at $52 -- PT] If that EPS becomes $2.50 the sticker becomes $72 and MOS is $35. Is $2.50 EPS outrageous to imagine? They did it in FY2011 and I believe they can achieve that again and more.
[NOTE FROM PHIL: The valuation consideration is less complete than I would want before I put a Sticker on this. We never just run the Valuation on the Tools and assume its right. I'd look at Payback Time and Zombie. I'd look at Free Cash Flow and compare it to earnings to see if the PBT is better or worse. I'd make a case for a specific growth rate and PE. And I'd make sure I was starting from a reasonable TTM EPS. Maybe you all can fill in the blanks here. Is it possible that Ebay is on sale? If not, why not and if not then why is an investor as astute about value as Julian Robertson buying in at $53?
The Ebay moat is Brand, Switching, Toll and Price. Brand is self-evident. Switching is difficult because of the Ebay rating system. It is a Toll Bridge moat there being few other real choices for dumping your stuff on line effectively. And Price is the whole point - the ability to get something cheaper than in a store.
No question, this is a wonderful company. I think it does have a durable moat. But price is everything and it appears to be expensive. So, again, why is Robertson buying?
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