eBay: An Unwanted Bargain

Good news, investors! eBay’s stock is trading at a value. It’s priced at 25 times the $1.36 a share that is the mid-point of the company’s guidance for net earnings this year. A P-E ratio of 25 is, in general, pretty high. But for a company whose profit will grow 30% this year – significantly faster than revenue – that’s a value.

Now for the bad news: eBay’s been a value for most of this year, and nobody seems to care. Which raises an ugly question: What if the market continues to not care? Buying a value stock is useful only if other people decide after you do to buy it.

That’s not exactly happening with eBay. After posting a strong second-quarter earnings report, the stock has dropped more than 2% in after-hours trading as I write this.

Judging from some of the comments analysts made on the conference call, the mood-killing statistics seemed to be in the decline in the number of products listed for sale on eBay’s auction and e-commerce sites. Globally, they were down 6% this quarter. What’s more, gross merchandise volume (the total value of all goods sold through eBay’s core site) was up 12%, against 18% growth a year earlier.

When I spoke with eBay CFO Bob Swan, he pointed out that investors were reacting to concerns that the company told them about months ago. “We said that we’d be more focused on improving the buyer experience, and not as much on the number of listings,” Swan said. There were too many listings that were turning away buyers, so eBay started weeding them out.

As demand among buyers rises, listings should recover in the longer term. Meanwhile, there are signs that eliminating the “bad listings” is working – average prices of goods sold is up, as are conversion rates. And overall marketplace revenue is up 26%, above the 22% growth rate of a year ago.

Regarding Skype, Swan said that the unit has shown an operating profit for the second straight quarter. He declined to say what it was, but said it was approaching the 20% operating margin goal that eBay had set. Skype, which makes up less than 5% of eBay’s revenue, has brought in $364 million in the last six quarters, equal to 14% of the $2.6 billion eBay paid for it.

Om pointed out earlier an apparent paradox in the Skype data – revenue is rising even though minutes used were flattening out. Swan said that a subscription program that Skype had rolled out in North America was bringing in revenue to offset the lackluster growth in minutes used.

What’s holding back eBay’s stock? My guess is that eBay is a continual value because it’s a continual work in progress. To stay competitive in a market where growth rates aren’t quite what they used to be, eBay has to find profit growth by running an ever more efficient business or expanding into new areas of growth, or both. It’s chosen to do both.

But doing both has left the company looking like it’s always in the process of improving itself. By the time it’s reaping the fruits of earlier improvements, it’s already kicking up dust with a new round of improvements. So by focusing on gross merchandise volume, investors may be overlooking the growth in eBay units like Shopping.com, StubHub and Kijiji abroad that add to revenue without affecting GMV.

Beyond buying back more shares – eBay’s repurchased 75 million in the past 10 months – there’s little the company can do to entice investors back. Says Swan: “We’ll continue to focus on the matters at hand and let the rest take care of itself.” The only question being if and when the rest will take care of itself.

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