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eBay's great, but stock is overpriced | |||
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By DAVID MOON, Moon Capital Management Your May 401(k) and other investment account statements were probably a bit more pleasant to open this month than a year ago. Since March, the stock market recovery has everyone singing "Happy Days are Here Again," especially investors in a number of smaller companies. The NASDAQ leads the charge this year, outpacing the venerable and stodgy old Dow Jones Industrial Average. Since its March 11 bottom, the NASDAQ is up 28 percent. One of the surviving (and profitable) Internet retailers, eBay, is the perfect poster boy for the rally. Its shares are up 40 percent this year. The stock sells at a P/E ratio of just over 100. How soon we forget. I like eBay and use it regularly. Some people become addicted to it. Almost anything you might be interested in buying is probably for sale on eBay. Mark Cuban, owner of the NBA Dallas Mavericks, bought a Citation jet on eBay. I've purchased antique books and champagne. Some sick person once tried to sell the naming rights to her child through eBay. The company is profitable and has a growing and loyal following. But I cannot imagine it being worth 100 times earnings. Compare eBay to another fairly successful retailer, Wal-Mart. Yes, Wal-Mart is an entirely different business model. Wal-Mart carries inventory and has a physical location and tons of employees to pay. Wal-Mart's 2002 revenues of $246 billion were equal to about eight percent of all US retail sales last year, yet the company 'only' trades at 29 times earnings. (Wal-Mart does, by the way, have operations and revenues outside the US.) Is each dollar of eBay earnings worth three times a dollar of Wal-Mart earnings? Hardly. Shareholders and fans of eBay defend the price based on the company's higher growth rates and margins. If you extrapolate recent trends, eBay will have gross merchandise sales greater than Wal-Mart's within five years. To support today's price, an investor must assume that by 2013, the value of all merchandise sold on eBay will be greater than the total value of all retail sales in the U.S. last year. By 2015, eBay sales would have to exceed the current Gross Domestic Product of the United States. If you had an extra $33 billion sitting around the house, you could buy eBay (the entire company) at today's prices. Or, for the same $33 billion, you could purchase Sears, JC Penney, Circuit City and Best Buy. You would still have enough money left over to buy Toys R Us. Is eBay one-third as valuable as Warren Buffett's Berkshire Hathaway? The stock market thinks so. I'm certainly not criticizing eBay, but the shareholders who pushed the price up 100 percent in eight months have completely unrealistic expectations. Is this just an eBay phenomenon or is this company representative of another developing widespread speculative bubble? I really don't care. If you don't play in the traffic, you don't have to wonder how your body would hold up in a collision with an SUV. David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).
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