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Thursday, August 03, 2006

Contrarian Thinking On eBay (EBAY)

No one likes eBay. Well, maybe no one. Morningstar has a "fair value" estimate on the stock of $45. The stock trades at $23. Even USB, which dropped its price tarket, thinks the stock is worth $28.

Revenue in the second quarter did rise to $1.411 billion from $1.086 billion last year. Income from operations rise to $379 million from $311 million in the same quarter a year ago. Cash flow from operating activities was $1.1 billion.

The argument that eBay's best years are behing its are based on two assumptions. One is that margins and the number of people who will auction goods online has peaked. The other is that eBay's immensely successful PayPal online payment system will be eaten alive by a competitor introduced by Google.

Google built some interesting products, but very few have been commercial successes. Investors would also have to assume that hundreds of thousands of websites would go to the effort to change payment systems. For what? Google's new system which has not weathered heavy volume or long-term use? Well over 100 million people have PayPal accounts.

While eBay's growth in the US has slowed a bit, markets like China and India still offer rapid growth opportunities.

The eBay user base is still growing fast, and that is the critical issue in the company's success. According to eBay's 10-Q, registered users grew 29% in Q2 to 203 million. At PayPay, total accounts grew 44% to 113.7 million and total payment volume was nearly $9 billion.

The question is who will compete with eBay, both in the auction and online payment businesses. The answer is no one, at least not in the near-term, and perhaps not at all. eBay's lead in its two key businesses of auction and online payment is that great.

With the stock down by more than half over the last year, and trading at $23, which is 6.2 times sales and a forward P/E of 18.2, the stock is very cheap. There is not much to bring it lower, and just a little good news could start to push it back up.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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