Stock of the Day - February 2, 2009 - EBAY

eBay Inc. (EBAY)

When looking for a solid company to invest in, one of the main things you should be looking for is growth.  You want to invest in a company that is growing in market share and increasing net income and revenues every quarter.  Unfortunately, eBay Inc. (EBAY) is doing the exact opposite of growing.  The online retailer is actually losing money and losing ground to its competitors.

EBay reported a 4^th quarter decline in revenue of 7% and a 30% drop in net income.  This was the first time ever that eBay has posted a quarterly decline in revenue. Ebay.com, the marketplace unit for the company, fueled the lower revenue report, as it posted a 16% loss in revenue for the quarter.  The company also reported that merchandise volume fell 12% from the same quarter last year.

But, there were some positives for eBay.  Paypal, a subsidiary of eBay, increased revenue by 11% and increased its payment volume by 14%.  Paypal also grew its active accounts by 23% to 70 million members.  Skype, a popular voice-chat platform that is also eBay’s subsidiary, posted revenue growth of 26% and increased skype-to-skype minutes by 72% to over 20 billion.  Overall though, the company struggled in the 4^th quarter of 2008, and the future looks bleak.

The biggest problem for eBay is increasing competition.  With companies like Amazon (AMZN) and Craigslist becoming stronger by the day, eBay’s market share in the online retail sector has been falling.  Even GoDaddy.com launched a marketplace service last week, and it offers sellers a model that charges an enticing $4.99 a month for unlimited item listings and 10% on commission from sales. 

But, without a doubt, Amazon has been eBay’s biggest competitor and biggest source of problems.  Amazon just recently came out with its 4^th quarter numbers, and they were nothing short of beautiful.  Amazon’s revenue jumped 18% during the quarter, and international sales rose 31%.  Web traffic on Amazon also jumped 9.8% compared to last year, as eBay’s web traffic dropped 2.5%.  While eBay still gets more traffic than any other online retailer, Amazon is definitely catching up fast. 

So, while it might seem easy to just blame eBay’s problems on the macro economy and say that the company did poorly because people just don’t have the money to shop, Amazon’s success in the past quarter puts that thought to rest.  Amazon proved with its 4^th quarter earnings that it is still possible for an online retailer to be successful in this recession.  I believe eBay’s problems run much deeper than macro economic factors.  The company’s business model is getting old and there are too many competitors doing the exact same thing.  EBay needs to spark up some magic and find a new way to entice customers.  I have no clue what this might entail, but until eBay finds something new to get people excited to buy and sell merchandise on its website, the company has no growth potential.  And with no growth potential, there is no good reason to invest in a company.  Stay away from eBay for now, and wait until the company comes up with some new ideas.

Niki Pezeshki

College Trillionaire