EBAY: Buy!
EBAY, As the only brand name auction site on the internet, Ebay holds a consumer monopoly in the auction business. Moreover, the stock is currently trading at its 3 month support level and appears to be moving upward with the recent upward movement of the stock market. While the company’s P/E ratio is fairly high at 35, it is relatively inexpensive compared to its main competitors, Amazon.com (AMZN), which is trading with a P/E of 43. The current Ebay share has already priced in the lower guidance the company announced last quarter.
Ebay, while their core auction business has showed signs of stagnant growth, we believed their growth potential abroad is strong. China and India is clearly the next growth market. However, Ebay will likely need to partner with a Chinese or Indian company to really penetrate these markets due to political factors.
Couple of other growth path I would like to point out:
- Ebay recently signed strategic alliances with Yahoo! and Google to monetize their huge traffic. For instance, if someone searches for an item that Ebay does not carry, Ebay will now provide ads to other relevant sites. If the user clicks, the company will then split the ad revenue with their respective partners (Yahoo or Google). We see a lot of revenue potential with this deal.
- Ebay’s recent acquisition of Skype is also another growth potential. Skype is the fastest growing VOIP service to date. Most analyst covering Ebay sometimes forget about the potential of Skype. In addition to Skype’s subscription, Ebay is also integrating the VOIP technology to better service their users. We see huge growth for their Skype unit to contribute to the company’s revenue in the near future.
- Ebay’s Paypal unit continues to grow. It is the standard of e-commerce payment system. People are now using Paypal for more than just Ebay services. Paypal’s growth potential is also huge.
Of course, lets not forget, Ebay basically has a monopoly in online auctions, they can simply raise their fees if things gets really bad.
In the long term, we believed Ebay will do alright. Short term, their stock has been beaten down close to its 52 week lows. In our view, this represents a buying opportunity. The reward appears to outweigh the risk.
Comments
Ebay’s purchase of Skype first caught me off guard as well. Questions still remain as to how Ebay will actually use this technology. There are some clues however, last month, Ebay signed a deal with Google to test the “pay per call” advertising model outside the U.S. market. The “pay per call” model is where advertisers would only pay if a potential customer calls. I’m guessing they’ll be button where users can click to call if they’re interested; the underlying technology would be Skype.
If this works out, I believed it would be the next wave of online advertising. Part of the problem with the current “pay per click” model is the conversion rate is very low and click fraud is too easy. With “pay per call”, the conversion rate would be a lot higher as someone would not call unless they are genuinely interested. It should be interesting to see what happens.
Another potential way to utilize Skype is to integrate the technology into the site itself. Imagine every user of Ebay having a free Skype account. If they need to communicate, they can simply click on a button which would allow them connect instantly, free of charge. It would save a lot of typing and add value to the Ebay experience.
Posted by: Smart Investor | October 2, 2006 07:08 PM