The cacophony of eBay critics have been talking down the company’s value for over a year. The voices worry aloud about lower gross merchandise volume (GMV), lower auction revenue, and fewer eBay stores. I am not Pollyannaish; these are real concerns that portend real trends. But investors need to keep their eye on the ball. Will these concerns materially erode the business? What will be their likely effect on eBay’s free cash flow?
A few points. Critics often fixate on the worst number that they can find (often related to sales), rather than the most relevant (in my lights, free cash flow). For example, in the latest quarter (Q408), eBay’s marketplaces business unit (which excludes Paypal and Skype) recorded $1.27 billion in revenue, for a 16% YOY decline. Ah, woe, the sky is falling!
This is a big number, but two important caveats are essential for our analysis. First, a huge chunk of the drop in GMV (over a third) is a result of falling GMV for vehicles. Everyone knows that new auto sales are down nearly 50% YOY. Comparatively, eBay’s vehicle GMV was down 30%, or about $1 billion YOY. A second caveat—over half of eBay’s marketplace revenue is international. During the fourth quarter, the U.S. dollar increased significantly relative to most currencies. In their quarterly conference call, Bob Swan, eBay’s CFO, noted that excluding currencies and excluding autos, GMV in the core marketplace business was down 4%.
I would contend that a 4% decline in the core marketplace business, considered in itself, is not particularly significant for valuing the whole of eBay as a business. Active users at eBay increased 4% year over year. Active registered accounts at Paypal and Bill Me Later were up 23% YOY. The number of items sold were up 3% YOY. More customers bought more items, but at lower prices.
It is too soon then to conclude that eBay’s core marketplace business is in serial decline. Despite a terrible fourth quarter for retailers around the world, eBay’s annual free cash flow and earnings were up YOY. As the recession persists, and even if it deepens, eBay should weather the changes as well or better than its competitors in ecommerce. As we’ve seen, the 2008 numbers simply don’t show a significant problem in its marketplace business. But be assured, we’ll keep watching…
Coming up next—eBay’s “Problems,” Cont’d.
Disclosure: I, or persons whose accounts I manage, own shares of eBay at the time of this writing.