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April 27, 1999
eBay for Mom
by Dave Marino-Nachison
([email protected])
Trading at $209 as of April 26, 1999
The reason I'm recommending shares of online garage sale eBay <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EBAY)") else Response.Write("(Nasdaq: EBAY)") end if %> to Mom? Two words: Little Lulu.
Last I checked, there were about 100 different items listed on the site with the words "Little Lulu" in their name. Mom went for years deprived of memorabilia devoted to the apple-cheeked gal pal and her buddy Tubby before finding eBay and its two million items up for auction.
That void filled, I think it's time for Mom to find the stock as well. The timing is as good as ever. Shares of eBay -- public for about seven months -- have certainly appreciated far beyond what most of us probably expected, but there's plenty of growth ahead as the company makes moves to launch its brand into the stratosphere.
How does a company cultivate its brand? By relentlessly spreading the word and industriously standardizing the customer's experience. eBay is doing both, with aggressive domestic advertising and marketing, and an overseas strategy that began in February with plans for an Australian site. It has announced a host of "trust and safety" upgrades to quell some of the Bearish fears about fraud, and signed up U.S. Office Products' <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OFIS)") else Response.Write("(Nasdaq: OFIS)") end if %> subsidiary Mail Boxes Etc. and iShip.com to help with shipping. eBay has even added a "hold for inspection" program to soothe suspicious buyers.
And consumers have proven there's a huge demand for an online means to exchange their stuff for someone else's (most of what's listed on eBay is best described as "stuff"). According to Web metering company Media Metrix, eBay was the #20 website in terms of unique visitors in March with more than 8 million. Remove the dozen or so portals and search engines from that list -- some of them have auction services, but none that match eBay's scope or popularity -- and eBay's ranking improves considerably.
Matt Richey (TMF Verve), who sits about 24 inches to my right in crowded Fool HQ, describes eBay simply and effectively: "It's the classifieds." Now, if you could read only one classified section every Sunday, would you choose the county rag or the big metro paper? Chances are you'd head for the big one, increasing the likelihood you'd find what you want. And where would you list your car if you wanted to sell it? Hmm.
Ah, but what about competition? Well, taking down eBay will require not only a superior offering, but also the power to create a massive community at least as big as eBay's -- and that's a swiftly moving target. eBay grew its user base by 75% between the end of last year and the end of Q1 of 1999 to more than 3.8 million.
As such, the only company I worry about right now is -- no surprise here -- Amazon.com <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMZN)") else Response.Write("(Nasdaq: AMZN)") end if %> and its much-ballyhooed eight million members. No question about it, Amazon.com is a go-getter with ice in its veins. But eight million book and CD buyers aren't necessarily eight million auction customers. It's quite likely that many Amazon.com users are already faithful eBay users with little impetus to switch. And it's unlikely that Amazon.com -- or any company -- can jump into the game and displace the market leader. This will be a fight all right, but eBay is currently the biggest kid on the block and just hitting his growth spurt.
Another note about competition: Sotheby's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BID)") else Response.Write("(NYSE: BID)") end if %>, a company steeped in tradition, will eventually go online as well, possibly attracting high-end buyers and sellers. Somehow, however, I don't see Sotheby's trafficking too heavily in used CDs and wrinkled comic books. In addition, eBay recently agreed to buy San Francisco auction house Butterfield & Butterfield for about $260 million in stock, strengthening its presence in auctions of fine and decorative arts and higher-priced collectibles. eBay expects the deal to add to its earnings this year. Ahead of the game, as expected.
eBay's business model is brilliant -- it's a community that taxes the voluntary interactions of its members. It's a lot like charging a cover at a bring-your-own-beer party: eBay simply provides the couches for everyone to sit on and spends money on promotional fliers to hang around the neighborhood. Think of the company's four-year promotional pact with online services giant America Online <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AOL)") else Response.Write("(NYSE: AOL)") end if %> as an enormous, $75 million billboard on a campus of 17 million students.
Since eBay doesn't have inventory, its gross margins sit happily at about 80%, and it can spend handily on promoting and maintaining its business. For comparison, look at uBid <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: UBID)") else Response.Write("(Nasdaq: UBID)") end if %>. The company actually had higher revenues than eBay in 1998, but because uBid owns its inventory, its gross margins are only about one-tenth of eBay's. The economics of eBay wowed the Fool's own Tom Gardner, who said so in a January Rule Maker portfolio column.
And now, the real reason I'm recommending eBay to Mom: for reasons my sister and I have never been able to figure out, our mother is almost impossible to shop for.
Thanks to eBay and Item #89078865, the Little Lulu Pez dispenser, that's history.
eBay's Company Information:
Trades on Nasdaq under symbol EBAY
eBay's website: www.ebay.com
Current Quote
eBay's Chart
Other Related Links:
eBay's Message Board
eBay Dueling Fools -- 3/17/99
Rule Breaker Portfolio (eBay is a holding)
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