Dueling Fools
eBay Bubble?
March 17, 1999

eBay Bull's Rebuttal
by Rick Munarriz ([email protected])

I've known Paul for quite a few years now, so I trust that he won't be too offended if I state that if he were to put his bearish argument up for sale at eBay (Item 925842348) it would be hard to drum up any bidders. Then again, even smelly socks and deflated Fool balloons have been successfully auctioned off -- maybe he will find a believer out there.

Let's take a closer look at my fellow Fool's biggest gripes with eBay. Fraud on eBay seems to be a major beef with Paul, but it's overblown. "Even if only one in a thousand participants is dishonest..." he begins to write. Actually, eBay receives a complaint about fraud once for every 37,000 auctions. Those are some pretty good odds. If you head out to your local supermarket and fill up your cart with 37,000 items I'm sure at least one of those products will be scanned wrong. Try answering 37,000 classified ads or opening up accounts with 37,000 full-service brokers. The tangible world is much more sinister and much less reliable than eBay.

Paul claims that all one needs is an e-mail address to take on the life of a shyster. Not true. You also need a mailing address (and a passport to flee the country, I would imagine) to complete a transaction. eBay has a great system of using feedback from prior auctions. Before one places a bid, one is encouraged to check out the seller's history. The same goes for a buyer's reputation. Paul suggests that someone might conduct dozens of bogus auctions and send him or herself favorable feedback. Why would anyone pay the eBay listing fees, and the completed auction commissions due to eBay, for a single shot at duping a user out of $20 on a rare comic book?

Human decency comes with checks and balances. If a user were to try to bid up her own item -- uh oh -- if she's the final bidder that little game of hot potato will cost her the eBay fees.

Look, fraud happens, everywhere. As the online juggernaut, eBay is going to draw attention because it's simply a much better story than having folks crack down on The New York Times for bogus classified ads. I mean, eBay is a great story to begin with. Do you know how the site was started? Some guy wanted to set up a place for his candyholic wife to trade Pez dispensers online. Pez, people! Pez!

So, seemingly overnight, we have an Internet community of millions that Paul thinks is overpriced equity-wise. Last year, sales soared 830%. Oddly enough the stock is trading at 830 times next year's earning estimates. Is that balance or what? However, Paul seems to be skimpy in terms of how eBay will grow in the future. We all know that the majority of the world is not online. Growth. While the eBay site is accessible worldwide it is now setting up indigenous sites internationally. Growth. With a brand comes power. From magazines to programming to merchandising, the future belongs to eBay's contagious moniker. Growth.

What is this all worth? The company is only trading at half the market cap of Yahoo! yet, unlike the portal heavyweight, the only thing that runs higher than a legitimate barrier to entry here are the prospects for eBay itself.

Paul closes his opening argument with the Latin phrase "Caveat Emptor" or Buyer Beware. I'm not up on my Latin, but I do list a command of Pig Latin on my resume. That said, Paul's case is simply the work of the "iseway."

Next: The Bear Responds