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
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).