Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Market Insanity

EBay has Lots of Money but Little Growth

Believe it or not, eBay (NASDAQ: EBAY) has become a fascinating value investment in the post-PayPal era. It makes lots of money, but demonstrates very little capacity for growth.

EBay’s revenue growth has been tepid in recent years, back in September 2016; the auction site reported $8.906 billion in revenues. That number grew to $9.349 billion in September 2017. Sales are increasing slightly, but not dramatically.

Despite that value investors need to take a look at this company for one simple reason: eBay’s income is growing dramatically. EBay reported a net income of $1.807 billion in September 2016 that shot up to $7.521 billion just 12 months later. EBay added $5.714 billion in net income in just a year.

This is clearly a very profitable company, the quarter profit margin of 21.71% reported on September 30, 2017, is obviously for real. One more year of such income growth and we are likely to see eBay’s stock value double or triple.

EBay is undervalued

EBay was undervalued at the $37.52 a share it was selling for on All Saints Day 2017. That price is a bargain because of the 72.72% return on equity reported on September 30, 2017.

Even with no dividend, I would call eBay a value investment because it is making a lot of money. The ycharts data from November 1st 2017 shows that eBay is a cash-rich company.

There was a free cash flow of $720 million on September 30, 2017. Beyond that cash from operations was at $2.778 billion, that’s down from $3.246 billion in September 2016 but still very respectable.

More importantly, eBay is a company with a lot of extra cash or float; it had $6.03 billion in cash and short-term investments on September 30, 2017. That was down from $7.149 billion a year earlier but still very respectable.

Other value included $25.94 billion in assets on September 30, a market capitalization of $39.20 billion and an enterprise value of $43.29 billion on November 1, 2017. EBay is certainly an underappreciated value investment and it is in the tech sector which is fascinating.

What eBay needs to do

The best course of action for eBay is to follow the course, keep operating the business in the same profitable manner and rake in the cash. Then invest the cash in new technology or expanded the business to offset the slow decline in business.

The company is making some smart moves including launch a tool that will let people take pictures of items and search for them on eBay, TechCrunch reported. The app called Image Search was just launched and it is a smart way to get people using eBay via their phones.

A person would be able to use Image Search to price items at a garage sale or to check prices of merchandise at a store. Image Search’s advent will obviously convince some retailers to install wireless signal jammers or construct buildings of materials that block phone signals.

Such tools help eBay expand in its profitable niche without having to take on Amazon (NASDAQ: AMZN) directly. Other potential expansions for eBay might an alliance with retailers like Big Lots (NYSE: BIG) or TJX Companies (NYSE: TJX) or a pickup and delivery program from select retailers.

My take is that eBay will stay around and make money for a long time because it is in a very profitable niche. Little growth can be expected, but large profits are likely.

How the Baby Boomers’ aging will destroy eBay

The only real threat to eBay will be aging and dying off of America’s 74 million or so Baby Boomers (people aged 52 to 72). The Boomers are eBay’s main customers; their insatiable appetite for collectibles and kitsch drove its growth and recent profits. As the number of Boomers declines, eBay’s revenues and income are likely to fall.

One potential danger that eBay might face is a growing glut of collectibles and antiques on the market; as Boomers or their heirs sell and find no buyers. News articles indicate that Boomer’s kids; Generation X and Millennials, have little or no interest in a lot of their parents’ possessions.

The first thing a lot of them will do when they clean out mom or dad’s house; is to list everything, and see how much cash they can get. Another factor driving the sell-off will be all the Boomers who discover they have nothing to live but on but Social Security (the average Social Security payment was $1,342 a month in 2017 and many people will get far less).

The Economic Policy Institute estimated that nearly half of Americans have no retirement savings and the majority had less saved than $1,000 for retirement, CNBC reported in July. Given that reality, large numbers of Baby Boomers will sell their collectibles to raise money. Many of them will turn to eBay and flood it with personal treasures.

The Collectibles Market is about to Collapse

The bottom has already fallen out of some collectibles markets; including those for comics and books. Comics that sold for $15 or $20 back in the 1990s, only fetch $2 to $5 in today’s market. That trend is likely to spread to action figures, toys, records, DVDs, videotapes, and other pop culture-related items.

This means eBay is likely to see some of its most profitable markets dry up; as its most loyal customers die off, or run out of money. Expect to see a slow whittling away of eBay’s market over the next 10 years or so; that will lead to an implosion around 2030 unless management can tap new markets.

Therefore eBay will be a good stock to hold for the next four or five years. Beyond that, it is likely to disappear into the Wall Street junk pile fairly quickly.