NASDAQ/Growth/EBAY

[AceHigh]

You probably noticed that the NASDAQ has grown around 25+% this year where the DOW and S&P are around 10% for the year. I'm a value type, buy and hold investor so I don't normally go for growth stocks too much. And I don't care for most NASDAQ stocks. But there's one stock on the NASDAQ that interests me and that's EBAY.

I think EBAY is one of the killer apps on the internet. There are others, like Google, but the others seem to have trouble making profits. EBAY currently consistently turns a profit for the quarter and is growing rapidly.

I think EBAY, as an internet company has huge advantages over the old B&M auction houses. Most B&M auction houses are struggling to get online because they realize the advantages of being online. But EBAY is already the 800 lbs. gorilla of online auctions. The potential for growth seems huge.

Currently the stock maybe overpriced with a P/E of 100, but that isn't that unusual for NASDAQ stocks.

It seems the potential for growth, makes the risks relatively low for this stock and I could see the stock selling doubling and more in a year or two.

Comments?

[Ray Zee]

a p/e of 100 isnt unusual. well it certainly wasnt before the last crash when so many lost their bankroll. so if it doesnt increase its profits it will have a p/e of 200 then.

any stock with a p/e over 20 has to show bigtime growth soon to be of possible value. or it cant compete with other investments. people should have learned that lesson in the last decade but didnt.

[AceHigh]

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people should have learned that lesson in the last decade but didnt.

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Right, I know lots of techies who buy EMC or Oracle, because some salesman talked them into buying there product for there company. Lousy way to pick stocks.

Maybe this is a situation, sort of like poker, where we play things differently, because we understand the mistakes other players (stock buyers) are making.

Also I think EBAY might be different. It's relatively well run for an internet company, ie. it actually has earnings. As the internet becomes more and more acessable to other countries, EBAY will grow and grow. And I think EBAY has already reached a sort of critical mass, where if you want to auction something off online, EBAY is "THE" place to do it.

Does it even make sense to auction most things off at Southeby's or another other B&M auction house when you can offer your products to millions of people online? I know Southeby's is trying to get into the online auction biz.

It makes me think that eventually almost all auctions will be online auctions. And that will mean EBAY.

I'm thinking EBAY's pattern of growth and potential for growth take a lot of risk out of this investment. And give it a chance to have a huge upside.

[adios]

I used a two stage Discounted Cash Flow model for EBAY's valuation. If EBAY earnings grow at a compounded rate of about 25% for the next 10 years and level off to a growth rate of 7% thereafter the current valuation is about right IMO. The discount rate was 11% which I feel is conservative. I used those parameters to compensate for not using a 3 stage model which I'll try soon. I agree with your fundamental assessment of EBAY it's a question of whether or not it's worth the price. Ditto Yahoo. I mean they're both excellent businesses but are the risk-reward tradeoffs worth it. I guarantee that EBAY's valuation is based on a long period of growing earnings at a high rate. So if you think EBAY will grow earnings at a compounded rate of 30% over the next 10 years you've got yourself a bargain. If EBAY turns out to grow earnings at a compounded rate of 20% over the next 10 years you may have yourself a loser.

[Ray Zee]

and ebay runs into the size thing. it can only go so big. and 25% compounded is too much to hope for the next ten years. although it very well may happen, buying these type of stocks is a recipe for disaster. 100 times earnings is nuts for any company that is already established in a market. a startup maybe as it can achieve that type of growth to make it pay over a short period.

[adios]

A 25% compounded earnings growth rate over 10 years translates to a multiplier of slightly over 9 times todays earnings to be fairly valued, to be a bargain at say 30% compounded you'd have to see over a 13 fold increase in earnings over 10 years /images/graemlins/smile.gif. To be overpriced a 20% compounded (no slouch of a number btw) over 10 years a 6 fold increase in earnings over 10 years. Is the risk high? I would say very high. Yes I agree totally that these compounded earnings growth rates are very, very high especially over a 10 year period. I was just trying to offer a perspective on what a stock with a 100 PE has for an outlook in earnings growth. I'd also mention that this applies if the 100 PE isn't due to some one time non cash charge like goodwill impairment or something similar.

[Ashe]

I agree that EBAY is overvalued.

Book Value (mrq) $12.43
Earnings (ttm) $1.14
Earnings (mrq) $0.33
Sales (ttm) $5.38
Cash (mrq) $5.31

I like the cash figure, but all of these seem too low for a $110 stock.
Over the last 6 months, there have been 55 insider sells, and no insider buys. (NOT GOOD)
59% of this stock is owned by the institutions, making you vulnerable to their valuations and positions. (Just something too think about)
I agree that the valuation is based on estimated future profits.

I would stay away for now.

Ps. It's not profitable to buy or sell heavy objects on Ebay due to the shipping costs. (Example: turntable w/ speakers). /images/graemlins/mad.gif

Ashe /images/graemlins/smirk.gif

[AceHigh]

"So if you think EBAY will grow earnings at a compounded rate of 30% over the next 10 years you've got yourself a bargain."

Below are EBAYS revenue and net income numbers for the last 6 years. Based on these numbers, 30% seems low. At least for the next few years.

$ in millions 97 98 99 00 01 02
Revenue 5.7 47.4 224.7 431.4 748.8 1214.1
Net Income 0.9 2.4 10.8 48.3 90.4 249.9

The net income has increased over 100% each of the last 5 years! I wouldn't attempt to predict there revenue numbers 10 years from now, but based on these numbers it looks likely they will double there revenue for 2003 and 2004.

Here's where I got those numbers:
http://www.quicken.com/investments/seceval/?p=ebay

Plus it seems people and fund managers want to buy tech/internet stocks.
http://cbs.marketwatch.com/news/story.asp?guid=%7B6954085F%2D4232%2D4683%2DB22C%2D 6E898E163180%7D&siteid=mktw

And a stock split is planned for the end of August.
http://www.fool.com/news/mft/2003/mft03072503.htm?source=eptyholnk303100&logvisit=y& npu=y

I think EBAY is by far the best of the big name internet/tech stocks.

BTW, I hear NFI's dividend announcement on Thursday will be in the $3 range.

[adios]

Impressive growth, sweet business model for EBAY no doubt about it. The value of any security more or less is the present value of future cash flows discounted at a rate equal to the cost of capital. A two stage Discounted Cash Flow (DCF) model attempts to model earnings growth in two phases, a fast high growth and a perpetual long term growth rate. A three stage DCF would simply do it in three and is probably more realistic. Anyway I was just trying to give you a rough feel for what kind of earnings growth the current price of EBAY implies. In the two stage model say you thought EBAY earnings would grow a 50% rate for the next 5 years and then level off to 6% thereafter (more or less in line with GDP and inflation). EBAY would be slightly undervalued now. Anyway if you want to experiment with different parameters here's a sight that provides the DCF calculator:

Two Stage DCF Calculator (http://www.moneychimp.com/articles/valuation/dcf.htm)

As far as NFI goes I'm hearing lots of rosy divi projections from what I consider knowledgable people. We'll see. I'm still long and strong on NFI.

[GeorgeF]

These are some things I don't like about eBay:

1) The use of options means that management and employees will get paid first. Since ebay is a monopoly I see no reason to pay employees so well. The truth of the dot coms/Enron is that people made alot of money on them, they just were not the people that owned shares.

2) The assumption is that eBay will be a monopoly forever. This may be true but I don't want to bet on it.

3) At some point the people are going to realize that they are paying too much for busted up stuff on ebay. I am usually surprised at how much people will bid for stuff on ebay. The bidders don't seem to calculate that the sellers might rip them off or that the terms of sale are so much worse on ebay.

[AceHigh]

Thanks for the DCF calculator, that's a nice tool. I put in 100% for 3 years, then 10% and it estimated EBAY's value at $752/share.

FWIW, the quicken tool I use puts the intrinsic value of EBAY around $230/share.

[AceHigh]

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The use of options means

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We can't eliminate every company that gives options to management from our portfolios can we?

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eBay will be a monopoly forever

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Ebay's not a monopoly. But the size of it virtually assures that it will stay the dominate auction company for the forseeable future. It's a little like Microsoft and Windows, most companies have Windows because there are a lot of programmers who know windows. Most programmers learn windows because a lot of companies have windows and only hire windows programmers. Sort of a catch-22.

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paying too much for busted up stuff on ebay.

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I only dabble on ebay. But some of my friends, who are collectors, doing a lot of trading on ebay. They consistenly pay less for goods and get higher prices for there goods than they can get from local dealers. In fact, they do little selling to local dealers because it's hard to get more 20% of the value from dealers. Ebay is creating a lot of new, small collectors who can make money because ebay is a lot more efficient than the B&M stores.

[Wildbill]

Nobody looks at margins or the beauty of their model. This is a business with almost NO intensive capital needs, basically build offices for their employees and update their servers (something that is drastically going down in cost). What else do they spend on? Developer costs are minimal compared to revenues, their margins are only going to get stronger with more volume, their name is iconic. Think about what they do and how it differs from most businesses. In most business you have to use your working capital, not here their product is almost exclusively space on a website. Their popular because despite other big names trying to do exactly what they do, they all failed! Add to that the shifting of customer tastes. People talk about auctions and junk and whatnot, but the fact is people are starting to think about using like Walmart. Used to be you had something collectible in mind or maybe tickets to an event. Now you say to yourself I want to buy XXX, maybe I should look and see what it sells for on EBay. That wasn't something people did before. And you have people selling books and programs about how to get morons to sell on EBay. I mean that has to be the ultimate, other people are doing things to give you more business and you don't do a damn thing!

Valuation might be a bit sticky, but I think you just have to focus on the fact that it costs them relatively close to nothing to run this business and they continue to grow earnings because of the expanding margins. Margins are really where its at in the business world and in normally competitive markets those are what get sqeezed and take a product down. But who is going to take these guys on? This business flourishes because precisely everyone is there and its only become more pronounced. While you may not make a killing over a short period of time at this valuation, I don't think its all that risky as these multiples could come down over time and your price will still hold because its quite clear that earnings are going to grow and grow quite strongly.

As for those that think their market is limited, just remember most of the world doesn't yet buy online, nor do they patronize local EBay sites that heavily. As computer use and online shopping grows outside the US, this will become a more attractive "core" holding.

[adios]

"... and update their servers (something that is drastically going down in cost)."

Bigtime.

This is an excellent post most definitely explaining the bullish case for EBAY in depth. Your comment about using EBAY like Walmart is relevent to me personally. I bought several items during Christmas that I didn't even bid on that I was more than pleased with. I also bought a fairly expensive digital camera a month or so ago on EBAY which I didn't bid for. Couldn't get the model at Best Buy and it was far cheaper than what I could get it for at Circuit City.

[Aragorn]

I got screwed on EBay one time too many (and that was once). I don't expect to ever buy anything there again.

There has already been huge fraud committed on EBay. I think there is a realistic potential for serious scandal that could hurt their growth.

While a few annecdotes don't prove a lot, those high mulitples worry me. I don't know if they can sustain their growth.

[Wildbill]

Fraud is definitely among the biggest concerns, but the fact is that EBay is no different than say the local mall. Do they shut down the mall if one of the retailers is involved in fraud? That is the key, that EBay has no incentive to defraud you and will work to prevent it any way it can because it truly is one of the few things that could hurt them. Lesson on EBay, as it is in the "real world" is that there are no free lunches and that if something seems too cheap to be true, it probably is something you are better off avoiding. In life you can get something cheap or something that is a good value, which would you prefer? As the people that want just plain cheap fall off, the real dealers and the real values will start to show up on EBay more than anything and it will maintain its position.

[AceHigh]

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Ps. It's not profitable to buy or sell heavy objects on Ebay due to the shipping costs. (Example: turntable w/ speakers).


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Yeah, who would ship something heavy like turntables or computers? That's got to be one of the DELLest ideas ever. You need some kind of COMPAQ GATEWAY for that to work.

[Ashe]

Of all the things in my post, this is what you comment on? Anyway, the turntable and set of floor speakers I opted not to sell on ebay weighed much more than two computers, and believe it or not, shipping costs cut into everyone's profit margins, including Dell's.

So, you guys kinda sold me. I looked into buying a few LEAPs yesterday. I haven't made a move yet, and I'm not sure if I will. Buying Ebay would go against my style of trading, but I could use the diversity/risk, so I put it on my watch list. I would like to see the price fall some first.

It could be a interesting ride. /images/graemlins/smirk.gif

I'll yet ya know if/when I ever buy.

[AceHigh]

[ QUOTE ]
Of all the things in my post, this is what you comment on?

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Yeah, I was just being silly.

Still people trade heavy objects on ebay. Some sell real estate. So it can be done. Sometimes it only makes sense if you live relatively close to the seller. But that's not that different from B&M auction houses.