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  We're not bidding on eBay

BENJ GALLANDER and BEN STADELMANN

Friday, March 4, 2005

The March 22, 2001, headline on the satirical Web news source, The Onion, read "Everything in Entire World Now Collectible." The article cited examples on eBay of such items as milk cartons, latex paint, sponges, lint, twist-ties, factory runoff and postcards from music groups that were less than one-hit wonders that were netting big money.

The online auctioneer eBay parlayed this phenomenon into success for shareholders, becoming one of the select few companies that were able to shrug off the collapse of Internet stocks.

But this January, eBay's membership in the species growth infinitis suddenly became suspect. The latest quarter reported the customary juicy profit and revenue gains of around 44 percent each, but these were a tad below the expectations of dreamy-eyed analysts.

Worse, the company revised its growth expectations downward for 2005 to a "measly" 16 percent, far below what was hoped. Shares closed down 19 percent on the day, and nearly $13 billion (U.S.) was sheared off the market cap. This was a case of being priced for perfection — as if flawlessness ever endures.

Fortunately for eBay, it has enjoyed near-monopoly status, with second-tier players like Amazon.com, Yahoo and Overstock.com not providing much of a challenge. The era of pretenders like Canadian upstart Bid.com is long gone. However, that does not mean that eBay's turf is impenetrable or that rivals will not steal some of its market share.

A proper analysis of eBay's business is a multifaceted exercise. The site's community board is the first place to sniff out timely facts ahead of a starchy analyst report; eBay's user community has rightly been credited with spawning the enterprise's dominance.

What seems clear is that eBay is evolving into a buyer's market where, due to the rapid proliferation of auctions on the site, average prices are dropping. Unfortunately, costs for sellers are on the way up. This naturally squeezes margins.

If a certain item happens to inculcate strong price action, the ruthless efficiency of Internet technology means that information can be rapidly gleaned and new buyers can arrive in virtual nanoseconds. Some sellers have even switched to using the site to sell inventory from their traditional brick-and-mortar operations. How regressive!

The company in some respects is a mirror image of our typical Contra buys. Some like to classify our purchases as risky because they trade at low prices with the enterprises in turnaround mode. At the same time, they labour under the impression that investments in large corporations with a terrific history of steady growth cannot possibly be treacherous.

This is a fallacy. History is littered with the carcasses of blue chips and phenomenal growth plays that have fallen to penny status and disappeared. While eBay's fate should be better than this, the recent price drop does not present a bidder's paradise.


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