Why eBay is a value investment, sort of?

eBay is a value investment because of its growing user base and low stock price. For example, eBay’s platform had 177 million active users in 3^rd Quarter 2018, Statista calculates.

Notably, that number is up from 160 million users in 3^rd Quarter 2016, 168 million users in 3^rd quarter 2017, and 175 million quarters in 1^st Quarter 2018. Thus, eBay’s user base grew by 18 million active users in two years.

That is an impressive accomplishment in the age of Amazon (NASDAQ: AMZN). Therefore, eBay is a value investment because shares in that growing platform traded at $30.38 on 17 January 2018.

eBay is a value investment because it makes money

More importantly, eBay Inc. (NASDAQ: EBAY) is making money from that platform.

For instance, eBay records a gross profit of $2.041 billion on revenues of $2.649 billion for 3^rd Quarter 2018. Thus eBay achieved an astonishing gross margin of 77.05% for 3^rd Quarter 2018.

In addition, to the gross profit, eBay Inc. generated a net income of $721 million and an operating income of $556 million during 3^rd Quarter 2018. Best of all, eBay’s revenues grew at a rate of 6.04% during 3^rd Quarter 2018

eBay is a value investment because it generates a lot of cash

Additionally, eBay is a value investment because it is generating a lot of cash. Specifically, eBay records an operating cash flow of $558 million, a free cash flow of $379 million, and an investing cash flow of $926 million for 3^rd Quarter 2018.

Consequently, eBay had $2.086 billion in cash and equivalents and $2.752 billion in short-term investments on 30 September 2018. Hence, eBay Inc. (NASDAQ: EBAY) had $4.838 billion in the bank at the end of 3^rd Quarter 2018.

Under these circumstances, eBay achieves classic value investment criteria. In particular, eBay generates a lot of cash but maintains a low stock price.

Thus, Mr. Market is undervaluing and under-appreciating EBAY. That gives eBay Inc. yet another value investment characteristic.

 eBay does not pay a dividend

Ebay is a value investment that has some serious shortcoming. Notably, EBAY does not pay a dividend.

Moreover, eBay lacks the massive amount of market capitalization growth that characteristics platforms like Amazon and Netflix (NASDAQ: NFLX). For example, eBay had a market Capitalization of $29.25billion on 17 January 2019.

Meanwhile, Amazon offered a market cap of $826.25 billion on the same day. Plus Netflix had a market cap of $140.70 billion on 17 January 2019.

Therefore, eBay is not a growth stock but the lack of growth can be an asset. Notably, eBay shareholders will not have to worry about massive price drops. Hence, eBay lacks the risk of many of today’s overpriced tech stocks.

In addition, a person can accumulate a lot of eBay stock without paying a lot of money. Thus, an investor could earn significant dividend income – if eBay ever pays a dividend.

Why eBay should pay a dividend

I think eBay should pay a dividend, because not having a dividend is driving a lot of investors away.

To explain, eBay’s current characteristics are those of a retail; or industrial, value investment not a tech growth stock. Hence, eBay needs to attract a very different class of investors.

The investors EBAY needs are the people looking for a steady income, not the tech speculators. The best way to pay such investors is to pay a respectable dividend.

eBay Inc. (NASDAQ: EBAY) has the cash to pay a nice dividend if management wants. Plus, the company is struggling with a low stock price and a lack of market respect.

A dividend could give EBAY a modicum of market respect and it will not cost that much. In addition, eBay can introduce itself to a whole new class of investors with a dividend.

Does eBay actually compete with Amazon?

Strangely, eBay is a value investment because it could be Amazon-proof.

To explain, I am not sure that eBay competes directly with Amazon. For instance, eBay caters to more independent customers who dislike Amazon’s business model.

eBay buyers include people who like to haggle and bid. In addition, eBay concentrates on less-stable categories of the market like collector’s items.

Hence, you can describe eBay as a specialized sellers’ market while Amazon is a mass market. In addition, Amazon has a very different pricing structure than eBay Inc.

Amazon is a wholesale market designed to sell at the lowest price possible. eBay is a retail market designed to sell at the highest price possible.

Amazon vs. eBay

To clarify, Amazon makes it money by selling vast amounts of stuff at a very low price. Hence, Amazon, like Walmart (NYSE: WMT) is a mass discounter.

On the other hand, eBay makes money by charging seller’s fees. Thus, the higher the price, the more money eBay makes.

This is why eBay is a popular market for antiques, collectors’ items, art, and other items with high emotional values. For instance, an old comic book or an antique coin is only valuable because somebody really likes that item.

Amazon sells books, but it sells books to people who want to read them. Generally, a reader is looking for the lowest price on a book. On the other hand, eBay sells to collectors. A collector will pay extra for special editions of a book he has never read.

Under these circumstances, Amazon wants to sell utilitarian items like soap or socks rather than jewelry or collector’s items. Yes, there is jewelry on Amazon but it is being sold at a low price.

This explains why Amazon’s platform and revenues will always be far greater than eBay’s. However, eBay does not need Amazon’s size because it can make a lot of money from a far smaller platform.

Therefore, eBay is a value investment for the age of Amazon. It is a smaller platform that has figured out how to make money without competing directly with Amazon.