What Future Does eBay have?

eBay Inc. (NASDAQ: EBAY) seems to have gone from major cultural force to struggling discounter in an incredibly short period of time.

Less than 10 years ago, eBay was America’s online store of choice. Today it struggles to maintain relevance; and keep Amazon (NASDAQ: AMZN) from poaching what is left of its customers.

Nothing shows eBay’s plight more than a comparison of its revenues with those of the Everything Store. Amazon reported revenues of $60.453 billion for 4th Quarter 2017, while eBay reported revenues of $2.613 billion for the same period.

This either leaves eBay in an enviable spot; it is too small for Amazon to notice or care about. Or in a horrendous position, eBay simply lacks the resources to compete with Amazon. That brings up a billion dollar question that might make eBay a value investment:

Does eBay Really Have to Compete with Amazon?

Shrewd value investors will ask the above question because a strong case can be made that eBay does not really compete with Amazon. eBay sells used items through auction and discounts to a select clientele.

eBay can be thought of as a specialty retailer while Amazon is a mass merchant that tries to sell everything to everybody. That makes Amazon’s real competitors Walmart (NYSE: WMT) and Costco Wholesale (NASDAQ: COST).

This line of thought only makes sense if eBay is making money so we had better ask that question. Unfortunately, when one looks at eBay’s latest financial numbers (those for 31 December 2017), the answer is eBay is not making money.

eBay reported a negative net income of -$2.6 million at the end of 4th Quarter 2017. The company did report a gross profit of $2.023 billion and an operating income of $1.36 billion for 4th Quarter.

eBay is a Cash-Rich Company

Despite the loss, eBay was generating some cash, it reported a free cash flow of $796 million and an operating cash flow of $988 million on December 31, 2017. eBay also had a lot of money in the bank on that date in the form of $2.12 billion in cash and equivalents and $5.863 billion in cash and short-term investments.

These numbers prove that eBay is a cash-rich company which is why value investors like myself are interested in it. Despite its questionable and almost marginal business, eBay generates a lot of cash.

That cash comes from a decidedly unsexy business. Selling old comic books, and dresses from the thrift store, is hardly glamorous but it can generate cash.

The cash made eBay a bargain at $39.71 a share on March 23, 2018. Among other things, it puts eBay in a position to deploy new technologies, make acquisitions and preserve its position.

Amazon is no Threat to eBay

eBay has become a true value investment because the company has proved it can survive and perhaps thrive in the age of Amazon. One reason why eBay makes money is by not competing directly with Amazon.

Another is by tapping markets Amazon ignores; or treats as a loss leader, such as collectibles and used clothing. Those sectors are dominated by smaller traders that need a higher markup than Amazon is willing to pay to survive. eBay is willing to let small merchants offer that high markup which is why it can survive.

In the long run, this means eBay will never be a giant mass merchant like Amazon but it does not have to be. If eBay can preserve it’s’ small and cash-rich, the auction company can survive for at least another decade.

A good recommendation for eBay would be to avoid competing directly with Amazon and concentrate on used items or discounts. Another excellent recommendation for eBay will be to start paying a respectable dividend in order to purchase some stockholder loyalty.

As long as it stays a cash-rich niche player, eBay should survive. One way to keep doing that it is to maintain as small a footprint as possible in order to avoid too much attention from Amazon.

Despite what some people think, eBay should have a very bright future because it is one of the few smaller online merchants that can compete in the age of Amazon.