Amazon (NASDAQ: AMZN) is a far better; and in many ways a far more revolutionary company, than eBay (NASDAQ: EBAY). Yet the latest financial numbers show that eBay is still a far better investment than Amazon.
The latest earnings report indicates that eBay’s stock delivered a stellar performance despite the company’s lack of growth. Ycharts data indicate that eBay investors enjoyed a 98.98% return on equity; meaning they nearly doubled their money, a 6.45 earnings per share figure and a profit margin of 18.63% on December 31, 2016.
What is even more interesting is that eBay has now become a classic value investment. The earnings report and the company’s attributes meet the classic value criteria.
eBay is now a Value Investment
eBay now has many of the attributes of classic Buffett or Graham value investment including:
- A low stock price, $32.05 on February 1, 2017. Amazon was trading at $825.64 a share on the same day.
- Lots of cash, $7.149 billion in cash and short term investments and $2.826 billion in cash from operations on December 31.
- High income it reported a net income of $7.266 billion on December 31.
- An unsexy business; online auctions, that is widely viewed as old-fashioned or outdated by many in the market.
- A business model that does not attract much attention.
The Good, the Bad and the Ugly at eBay
Despite all that there are some indications of serious future problems in eBay’s financial numbers. There’s also some hope for the future in at least good number.
The good at eBay is the net income which has shot up at an incredible rate in recent months. Back in September 2016, eBay reported a net income of $1.806 billion, on December 31, it reported a net income of $7.266 billion.
This indicates that eBay had a fantastic holiday season it added $5.549 billion in revenue in just three months. It also reversed the trend last year, when eBay’s net income fell from $2.271 billion in September to $1.72 billion in December.
Now for the bad, eBay’s revenues have been flat for a year and a half, since the PayPal (NASDAQ: PYPL) spinoff. The rate of revenue growth at the company has been glacial, eBay reported revenues of $8.644 billion in June 2015, (after spinoff) and $8.979 billion in December 2016. That made for $335 million in revenue growth in 15 months, respectable, but nothing compared to Amazon.
This indicates that eBay may have reached the limits of business model. There simply is no room for serious growth in its niche, which might lead to serious problems in the future. A major problem eBay faces is that unlike Amazon it has not been to reach a mass audience, it is still a site for hobbyists and geeks.
There is also one very ugly number in eBay’s financials and that’s cash from operations. Over the course of 2016 the amount of cash flowing through eBay’s till fell by $1.207 billion, and that occurred in eBay’s first year without PayPal.
eBay reported $4.033 in cash from operations at the end of fourth quarter 2015, and $2.826 billion in cash from operations on December 31, 2016. This is worrisome because all the additional revenue growth does not seem to be translating into additional cash.
It looks as if eBay has a business model with no float. One disturbing possibility is that all of eBay’s float was being generated by PayPal which is long gone.
The Future of eBay
This brings us to the future of eBay because the financial numbers cast its future in serious doubt. The company no longer seems capable of revenue growth or of bringing in more cash.
That indicates serious changes to eBay’s business model might be needed. One possibility might be to stop trying to be Amazon lite and create a separate identity. A potential identity might as the discount destination on the web, or the anti-Amazon.
One of the few bright spots in brick and mortar retailer during the 2016 holiday season was TJX Companies (NYSE: TJX) operator of bargain department stores Marshalls and TJ Maxx. TJX is expanding adding new stores; even planning a big new brick and mortar location, in Manhattan as industry mainstays like Macy’s struggle for survival.
TJX distinguishes itself and succeeds by having a wide net of inventory buyers who sweep stylish bargains at low prices, Bloomberg reported. It often makes small bets on limited batches of desirable goods. It also buys close out goods and rejects from competitors.
eBay might be able to survive and grow its business by doing much the same thing. One possible solution would be developing algorithms capable of identifying the best suppliers and promoting them. Another way eBay could copy TJX is to offer a sort of online “treasure hunt;” offering unique bargains at low prices much as Maxx does.
Customers go to Marshalls and other TJX outlets for the thrill of the hunt, and the excitement of discovering unique bargains. Such a strategy might also finally help eBay achieve the elusive goal of attracting a mass market.
Even though eBay is still a far better stock than Amazon, its future is in serious doubt. Serious changes will have to be made to this company for it to simply survive.