The market got nervous again today as this weekend’s financial rescue plan was presented to Congress, which appears likely to debate the plan. As stock prices declined again today, my bid for eBay (EBAY) was triggered at $21.75. I added a half position in this online auctioneer and online payment processor to the Fat Pitch Financials Portfolio.
It looks like I’m overweight auctioneers given the addition to my Sotheby’s position this past week and now my new position in eBay. My loose thesis is that the current financial crisis will cause distressed businesses and individuals to liquidate assets. Auctions are a quick and efficient way to liquidate assets. While auction prices might decline, volume will likely increase. I’ve also seen some signs that there is a new trend towards frugality. Most importantly, auction marketplaces exhibit the network effect, where the more people use the service, the more valuable it becomes. This network effect can provide a market leader with a massive sustainable competitive advantage that effectively builds a wide moat around the company shielding it from competitive forces. The network effect is working in eBay’s advantage in both its online marketplace and its PayPal electronic payment system.
Yes, I know eBay has plenty of warts, but it also has one hell of a wide moat. Over the past few years eBay has made several misteps, most notably the acquisition of Skype and fluctuating auction listing price structure, but the company still continues to be the undisputed leader in online auctions in the United States. Also, its PayPal online payment service is one of the standard methods small businesses and individuals use for online transactions. I use it almost every day.
With Meg Whitman’s departure earlier this year, there is the potential that eBay will once again focus on its strengths and core business under the new CEO, John Donahoe. He has been been tweaking listing prices, payment policies, and is capping shipping fees. It appears the overall goal is to improve the buyer experience on the site, even though these actions might further alienate some sellers. There is also a rumor that eBay is considering shedding Stumble Upon, which it only purchased last year. I would also like to see it unload Skype, but it will likely be harder to find a buyer for that service.
While I’m sure many other value investors might still balk at the price of eBay shares, I find the shares to be trading at a reasonable discount at this point. If the shares continue to decline, I will be able to add more shares since I’ve only bought a half position at this time.
There is more that I would like to write about my new eBay position, but I have a nasty head cold. Hopefully, I’ll wake up in the morning with less stuffed up sinuses and a clearer head.
Disclosure: I own shares of eBay.