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Get Four
|  | FEBRUARY 24, 2004
 FOCUS STOCK By Scott Kessler eBay: Where the Action Is Online Expanding services, foreign growth, and ever-expanding popularity earn the online auction giant S&P's top rating of 5 STARS, or buy From its humble beginnings as an Internet auctioneer mainly for collectible items like PEZ dispensers and Beanie Babies, eBay (EBAY; recent price, $69) has evolved into the world's largest online marketplace. Standard & Poor's Equity Research believes its shares represent a compelling investment opportunity, based upon eBay's leadership in what we consider the attractive areas of Internet auctions, retail and payments, and its proven ability to expand into new categories, geographies, and services. We also think the shares are appealingly valued, based on our intrinsic analysis. The stock carries our highest investment ranking of 5 STARS, or buy. eBay was launched in 1995, to establish an efficient marketplace for individuals to trade goods. The site enables users to list items for sale, browse through goods organized by categories, bid in auctions, and make immediate purchases. eBay also owns and operates discount retailer Half.com and online payments business PayPal. Despite being a for-profit venture, eBay has never been solely focused on just transactions and profits. In our view, it has always tried to pay special attention to its users. This has contributed to significant customer loyalty and valuable word-of-mouth marketing. eBay actively promotes user interaction and relationships, and user feedback serves as the foundation for the ratings of both sellers and buyers. VIRTUOUS CYCLE. eBay has been buoyed by the so-called network effect -- the concept that a network becomes more valuable as its number of constituents and usage increases. Initially, users were attracted to eBay because it offered hard-to-find inventory via a unique online platform. Perhaps a family member or friend recommended the nascent Web site. Soon, eBay's growing population of would-be buyers attracted a larger number of sellers, which in turn led to even more prospective sellers and additional vendors. This virtuous cycle continues to this day and raises the value of the eBay network. As of December, 2003, eBay had 94.9 million registered users, up 54% from the prior year. Despite its already significant customer base, quarterly growth in registered users actually trended higher in 2003. eBay's well-known brand and large and active user base constitute a significant competitive advantage, in our view. The online-auction site is still the company's flagship business, accounting for $4.4 billion of gross merchandise sales in the fourth quarter of 2003. We estimate that eBay accounts for a majority of all Internet auction listings and gross merchandise sales. However, eBay has broadened its business to become a mainstream shopping destination. It was able to successfully evolve in this way, in our opinion, by expanding its inventory and purchasing options. For example, eBay had only a single billion-dollar, gross merchandise sales category in 2001 -- eBay Motors. Now it has six. Newer categories are also showing notable growth -- including business-to-business segments like construction, industrial supply, and wholesale. PAINLESS PAYMENT. eBay's enhanced purchasing options are also making it more appealing to mainstream users, in our view. Soon after its July, 2000, purchase of Half.com, eBay began offering "Buy It Now" instant-purchase capability on its flagship site. Fixed-price transactions accounted for 28% of gross merchandise sales in the fourth quarter of 2003. We believe they have resonated with buyers who don't care to wait for an auction to end. eBay also offers enhanced payment options via PayPal, which enables any user with an e-mail address to send and receive online payments. These transactions are relatively inexpensive (free to the buyer, though the seller pays a fee) and fast. The effectiveness of these pricing, purchasing, and payment advancements is notable, in our view. In 1999, collectibles made up 60% of gross merchandise sales, and practical (noncollectible) items 40%. After the deployment of these additional choices, 87% of 2003 gross merchandise sales came from practical items, with only 13% from collectibles. eBay's share of the U.S. online retail market has risen from about 16% in 2000 to 22% in 2003. With these advances and international expansion, eBay has estimated its market opportunity at some $1.9 trillion, which we think could prove conservative. GROWTH PROJECTIONS. eBay seeks to build on its leading position in online trading by broadening its platform across new product categories and geographies, by enhancing features and functionality such as payments, and by fostering customer affinity. It has a presence in 28 countries, up from only 8 in 2000 and 1 in 1999. It has the leading e-commerce Web site in 12 countries and is the top online-auction destination in 16 nations. From 2001 to 2003, average annual growth was 78% in international users, 114% in gross merchandise sales, and 141% in transaction revenues. PayPal is another important element to eBay's rise. It has seen notable growth in accounts, active accounts, payment volume, and revenue since its acquisition in October, 2002. In the fourth quarter of 2003, 91% of eBay listings offered PayPal, and 65% of the Web site's transactions were consummated using the service. eBay wants PayPal to become the standard payment method on eBay.com and in its international markets. It's also working to make PayPal more prominent on non-eBay Web sites. Reflecting these initiatives and conditions, we believe eBay will be able to deliver revenue increases of 40% in 2004 and 30% in 2005. Over the next three years, we expect sales growth to average some 32% annually. We believe eBay has formidable resources to deploy on marketing, technology, and strategic acquisitions. It recently had a market cap of over $44 billion, and cash and investments of $2.8 billion -- and no debt -- as of December, 2003.
BW MALL
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