It's been a minute since I wrote my last post. I was preoccupied with an ultramarathon that I competed in. But I have returned!
I’ve had eBay on my watchlist for a very long time. Right now, my portfolio is set for the foreseeable future. That being said, I don’t want to stop offering people new and interesting ideas. This is what brings me to eBay. I would be rather surprised if someone living in the United States has never heard of eBay before. It is perhaps the world’s largest online auction house. It is a vast marketplace where a person can post an item to sell or even create their own eBay store. I personally use eBay to find great deals on slightly older computer electronics and high-quality tools.
Windows 11 did something interesting. Microsoft decided to stop supporting a wide range of older CPUs that still function just fine. This caused the price of many perfectly good computers to collapse, since most people have no idea how to run a Linux operating system. I write all of these posts using a Dell office computer whose processor is just outside the limit of what Windows 11 will support. I got it for 50 bucks and installed Ubuntu as the OS—it works perfectly fine. When I read the SMART data on the HDD, I learned that computer was only turned on for a total of 387 days even though it is about six years old. There are also great deals to be had on tools as well. I found a 3/8" drive Proto ratchet for $20 that would typically cost $50–$60 brand new. All I had to do was open it up and spray some Kroil in it, and it works just fine.
eBay has addressed many problems with fraud, although some still exist. For luxury items such as designer handbags, eBay created an option for the item to go to a professional authenticator. If the luxury item is a fake, the customer gets a full refund. I’ve bought some items for my wife this way. My wife also likes finding good deals on Carter’s brand clothing for our kids on eBay. One extremely nerdy thing I did involved Star Wars. I’ve always hated how George Lucas made some notable changes to the original movies and then prevented the sale of the original versions of Star Wars. I went on eBay and found VHS tapes of the original Star Wars movies that were produced before George Lucas tried to turn the entire franchise into The Phantom Menace. I also found a certified refurbished Dyson vacuum cleaner for 50% off that was being sold by Dyson itself.
Then, of course, there are eBay’s auctions—probably the most unique part of the shopping experience. Auctions are yet another way shoppers can find great deals on items. eBay is a truly unique place to buy items. Everyday people can sell things and have the same reach as major corporations, who also sell items on the platform. My main point here is that eBay appeals to a wide range of people and offers a very unique way to shop. If you didn’t already know what eBay is, ideally that explains it.
eBay vs. the S&P 500 as far back as I have data:
eBay vs. the S&P 500 over the last ten years:
eBay vs. the S&P 500 over the last five years:
eBay vs. the S&P 500 over the last three years:
eBay vs. the S&P 500 over the last year:
Most well-established, moaty companies that have been around for decades—like eBay—will beat the S&P 500 over the course of decades. But a lot of that includes the early growth stages of the company, which have come and gone. I think the 10, 5, 3, and 1-year charts are more important here. Given that we have been in this insane tech bull market since about 2014—one that is quite possibly getting its third wind somehow—I think eBay has had a respectable performance.
There some important points to consider:
The first point I want to make relates to revenue. eBay is long past the rapid growth phase of its early days. It has competition from other major online retailers. The thesis here isn’t based around massive revenue growth. That being said, eBay’s revenue isn’t shrinking and is, in fact, rising at a modest pace. Given that revenue growth isn’t the name of the game, my primary interest becomes share buybacks. As you can see, eBay has a long history of share buybacks.
Next, with a mature business, I’m curious about cash flow and how likely it is these buybacks will continue into the future. This is where something interesting shows up. Free cash flow greatly exceeds cash from operations, where is this money coming from and how sustainable is it?
Page 68: This excess cash is coming from maturities of assets and the sales of shares in various other companies.
Next question: What are these other assets?
Page 83, Note 6 - Investments: eBay has a bond portfolio. Between this and selling off its stakes in other companies, eBay has been able to fund much of its buybacks over the last few years.
Page 18 and 19: Dividends and buybacks continue to exceed free cash flow, again raising the concern that the pace of current buybacks isn’t sustainable long-term. Assuming these other sources of cash flow dry up and eBay can no longer exceed its free cash flow for buybacks and dividends, the volume of their payout to shareholders could drop by 48%.
That being said, eBay’s current market cap is $33 billion. Free cash flow over the last five quarters was $2.5 billion. Relative to market cap, eBay would still have the ability to pay out a solid amount of cash to shareholders. A 48% reduction sounds horrible, but relative to market cap, it would constitute a shift from amazing to good.
I also wanted to point out that eBay has a reasonable amount of debt. I didn’t see anything of concern there.
eBay is a very intriguing investment. The company behaves in a financially responsible manner and returns a lot of cash to shareholders. That being said, eBay has not had much in the way of revenue growth over the last decade. However, eBay is currently projecting revenue growth over the next year. Between buybacks and revenue growth, eBay could offer a nice return. As of this writing, eBay’s PE is 17. I personally wouldn’t be tempted to invest unless I saw some degree of —even mild— revenue growth, or if eBay’s PE took a dive. For me eBay remains a stock on my watch list.
Now let's talk about moat with Hamilton Helmer's 7 Powers:
Scale Economies
Unit costs decrease as production increases.
Nope.
Network Economies
The value of the product increases as more people use it.
Yes, eBay is the definition of a network economy. The more buyers and sellers using the platform, the more momentum the company has. Once a critical mass of buyers and sellers is achieved, the business essentially becomes self-perpetuating. Buyers will show up for the selection, and sellers will show up because the customer base is there, creating a virtuous cycle. This is the definition of a network effect—the more people that use the platform, the better it becomes.
Counter-Positioning
A new entrant adopts a superior business model that incumbents can’t imitate without hurting themselves.
eBay isn’t a new business, they are the incumbent now.
Switching Costs
Customers face significant costs (financial, time, effort) when changing providers.
Nope.
Branding
Durable value from perceived quality or identity.
Possibly there is a meaningful brand with eBay. When selling anything online, people are often worried about getting ripped off, and eBay is well known for its buyer protection against scams.
Cornered Resource
Exclusive access to a critical asset (e.g., talent, IP, location).
No.
Process Power
Superior processes that are hard to copy and improve efficiency or quality.
No.
Okay, Bye bye now.
My Portfolio:
MCD, MITSY, AFL, META, JPM, MGM, SPG, COF
*I think it is worth stating that just because I hold a stock doesn’t mean I think it’s a good idea to buy it right now.
*Disclaimer*
You can and will lose money in the stock market. You can lose all of your money. I can and will be wrong. I have been wrong in the past. I have lost money in the past. Investing in stocks is risky and should never be considered safe. Invest at your own risk.