Financial Analysis Of Ebay Inc.

eBay

Memo

From: Dmitri Repnikov

Date: 12/1/2007

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Introduction

The purpose of this memo is to provide an understandable analysis of eBay, Inc., from an investor's standpoint. It will include the business background and its analysis. Following eBay's industry examination, a recommendation on eBay's stock is provided along with several valuations.

The Company

Situated in a fairly complex internet industry, eBay has managed to move from a small community to a multi-billion organization with 13,200 employees in barely ten years of existence. It was founded and headquartered in San Jose, California in 1995 with a vision to connect people, rather then sell them goods. eBay "pioneers communities built on commerce, sustained by trust, and inspired by opportunity. It also brings together millions of people every day on a local, national and international basis through an array of websites that focus on commerce, payments and communications" (eBay.com). By providing such a powerful online marketplace trafficking millions of buyers and sellers each day, eBay operates in three key sectors: marketplace, payments and communications. The marketplace refers to not only the notorious eBay.com, which includes both auction and fixed price set-ups, but other sites, such as shopping.com, rent.com and half.com. This marketplace would have long been in the dust since the internet bubble if it wasn't for its key savior, the feedback forum, which contains ratings and comments on buyers' and sellers' every transaction. Communities are built around trust and that is exactly what eBay has attempted to maximize, especially when it never physically takes possession of the goods or the payments sent. In addition to providing tools to its users, eBay has formulated an efficient way of communication. eBay.com already lets its members to contact each other with great ease and in an attempt to further limit fraud, and more importantly offer a free international communication software, eBay acquired Skype in October 2005. According to eBay.com, it is the world's fastest growing internet communications software offered in 28 languages. In order to finalize its mission of creating a powerful online platform for the sales of goods and services, eBay bought out Paypal in 2001. Paypal is an internet service that lets individuals, firms, or anyone with an email address to send and receive payments online. Paypal has tens of millions of registered accounts and "uses the world's most advanced proprietary fraud prevention systems to create a safe payment solution," which has been almost flawless, attracting millions of merchants worldwide to accept payments over Paypal. eBay has been able to bump the average sale price as the main determinant of its transaction fees. It is also important to mention the insertion fee, which depends to the listed price of a good. There is also a final sale price fee, which ranges from 1.5% to 5% of the final price. Lastly, additional listing fees are optional, but enable sellers to promote and make their products seem more attractive with features like highlights or larger images.

The Industry

The internet industry is a complex one, composed of several sectors and surrounded by heavy competition due to a large threat of new entrants. In a quickly-developing world (much increased internet access), the industry's focus is based on offering different ways of finding information and the better company is at doing so, the more traffic it will attract. Traffic is the key determinant of advertising revenue, where the spending seems to be as inelastic as the U.S. oil consumption. In a recent article on Reuters.com, it is reported that U.S. internet advertising revenue rose 25 percent to a new record, $5.3 billion. In fact, online advertising has hit a new high in each of the past three quarters, which suggests that there is a large and growing demand (see chart below). This surging market is only paving the road for giants like Microsoft (recent $6 billion purchase of Aquantive) and Google ($3.1 billion for DoubleClick) to keep investing in their online advertising sectors. "The most compelling argument (for the deal) is it is accelerating our display advertising business," Google Chief Executive Eric Schmidt said on a conference call with reporters and analysts. "I'm calling from Argentina where Google is opening its latest sales and support office..." (news.com)

Source: PwC/IAB Internet Advertising Revenue Report (www.iab.net)

As already mentioned, a few of the industry heavyweights include Google, Amazon, and Yahoo! Each company's market share varies however, due to the complexity of analyzing the internet industry as a whole - Amazon and eBay belong to the catalog and mail order houses industry (e-commerce); while for example, Google and Yahoo! are the leaders of the internet information providers industry. Regardless of that complication, the internet industry has yet to mature and certainly still shows signs of accelerating growth. The scope of competitive rivalry is global, as innovators around the world are developing technology in order to increase global efficiency.

The Porter Five Force analysis may help determine whether to enter or simply improve a firm in an existing industry. Costs have been greatly reduced, which has led to website start-ups to be practically free. Therefore, the internet offers great rivalry and competition among existing firms, as well as endless opportunities for the small start-up entrepreneurships. Threat of substitutes is high when there are millions of substitutes and alternatives. Supplier power is obviously large when consumers have fewer choices. However, like in any other industry, firms will copy each other in terms of goods and services, which would ultimately increase the number of suppliers. Finally, the power of consumers directly related to how many choices they have. Lots of additional choices to come, considering that the internet has only been accessible for a little over ten years.

The driving force behind the industry's growth has a great deal to do with studying web traffic and expanding the target audience to brand new markets overseas. It is too easy to point out Google as an epitome of the industry's leader as it keeps coming out with new services (partially breaking Microsoft's software monopoly)