Market Mad House

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

Long Ideas

eBay Proves It Has Value

Bay Inc. (NASDAQ: EBAY) demonstrated that it is a value investment with a lot of float with its Quarter One earnings release on Wednesday April 22, 2015. CEO John Donahoe and his team also showed PayPal should be a value investment that generates a lot of float when it goes public sometime later this year.

Quarter One figures that demonstrate eBay has a lot of float include:

  • A Total Payment Volume of $61 billion.


  • A Gross Merchandise Volume of $20 billion.


  • A TTM revenue of $18.09 billion on March 31, 2015. eBay’s TTM revenue increased by $1.53 billion over the past year. eBay’s revenue for First Quarter 2015 was $4.45 billion.


  • A free cash flow of $829 million.


eBay also purchased $1 billion worth of common stock, a sure sign that the management team believes in the company. Okay, now for the $1 billion question: how will eBay do without PayPal and vice versa?

PayPal is doing well; its total net payment volume grew by 18% to $61 billion during the first quarter. Its merchant services grew by 26%, but its on-eBay volume fell by 1%.

The numbers show that PayPal is a great business even if eBay is not. It was able to increase the number of active accounts by 11% and process more than one billion new transactions in the quarter, an increase of 24%. The avrage active account was used 23 times during the quarter.

It looks as if PayPal is generating a lot of float; it is looking more and more like a classic Warren Buffett value investment. The growing payment volume and increasing number of loans it issues generates the float that keeps PayPal’s cash flow growing. PayPal is operating more and more like a bank, and banks like Bank of America (NYSE: BAC) are some of Uncle Warren’s favorite companies.

My prediction is that PayPal could be a pretty hot stock when it finally hits the exchange. Its business model is sound, and it has a lot of cash, but what about eBay’s core marketplace?

eBay’s Weaknesses

That’s not so hot; the Marketplace’s gross merchandise volume declined by 2%, and international volume declined by 4%, yet it still produced $2 billion in revenue. eBay is making money, but it looks like it has lost its momentum.

It gained 2.1 million buyers, but active buyer growth has started to fall. Yet eBay still had 157 million active buyers and generated $82 billion in Gross Merchant Volume. That would indicate that eBay is doing a pretty good job of customer retention but a poor job of attracting new customers. It’s starting to look like an established retailer with a loyal but mature customer base that has a hard time attracting newer and younger customers.

Okay, that’s not necessarily so bad; older customers are more likely to have money to spend and to spend more money. They are also more likely to be return buyers, which can keep business up. It may not impress tech industry analysts, but it certainly increases cash flow, which is my interest in a company.

For sellers, eBay still has some tremendous assets, including 25 million sellers and 800 million listings in addition to the 157 million buyers. It is also a tremendous asset for both sellers and investors.

eBay’s Bright Future

During the earnings conference call, eBay’s CEO Elect Devin Wenig made a few points that support my thesis that eBay is a value investment. They are:

  • “On the sellers’ side, eBay’s sweet spot is small and medium sized merchants and brands. They represent 70% of the global retail market, offering the diverse inventory and value our consumers are looking for.”


  • “An estimated $100 billion of value is trapped in people’s closets and garages and that’s just in the U.S. This is an enormous opportunity with simplified listing flows, predictive pricing data and higher touch intermediation for those that require it, we intend to make eBay the platform for consumers to buy and sell anything, anytime, anywhere.”

Wenig recognizes eBay’s strengths and plans to concentrate on its core business, which could generate a lot of float and cash if operated properly. eBay is a good brand that needs some revitalization.

It’ll be interesting to see what Mr. Wenig can do to improve eBay. As a long-time eBay seller, I can think of some obvious improvements, including making it easier for users to shut down listings. Another would be to increase the length of listings.


I’m especially excited by the promise of simplified listing flows; currently, eBay is pretty complex. It can be hard to work with listings, but it is still one of the most potent selling platforms around.

My take on the situation is this. Both eBay and PayPal are value investments; they’re great brands and well-run companies that generate a lot of cash. Both companies also operate in a sector that has a lot of room for growth. Yet they are also undervalued by the market, probably because they operate in an unsexy sector, namely, basic e-commerce.

If you’re looking for a good basic value investment with a lot of float, either eBay or PayPal will be well worth your money. They meet some of the classic value criteria, and I suspect shares in both companies will be affordable, at least initially.

Disclosure: Your blogger owns shares of eBay, and he also operates the Book and Comic Picker eBay store.