The earliest days of eBay (NASDAQ:EBAY) were extraordinary. Its business model was disruptive — it created a market that monetized everyone’s second-hand merchandise and even, in many cases, junk. Friends would tell me that they sold their used stereo system for almost as much as the cost of a new one.
The online auctioneer was an impulse shopper’s dream, and the idea that a market existed where you could not only sell something you didn’t want but could buy something you needed on the cheap was a godsend. The stock returned 36 times its IPO price through its all-time high in 2005.
So what’s changed? A lot. As long as its markets were not in equilibrium, eBay was a great idea. In other words, as long as you could sell something for more than it was truly worth and buy something for less than retail, life was good. For the most part, however, this is no longer the case. Not only is the market in equilibrium, but eBay is now known to everyone, which increases bidding competition, driving prices up. Once prices hit a certain threshold for buyers, the item is no longer a deal, and people move to other markets.
Amazon (NASDAQ:AMZN) is effectively a competitor once a certain price point is reached, and in some cases, it’s a direct competitor right from the start. That doesn’t even include the scores of indie merchants who work on thin margins but sell in high volume. Even these merchants have infiltrated eBay, and not always for the better. A significant gray market for certain items, such as toner cartridges, has existed for years. That not only lowers the quality of sell on eBay but also adds competition for sellers.
The result is that eBay has become just another department store — another retailer, if you will. It doesn’t have any stores or a fulfillment department, but a department store is what it has become. As CFO Bob Swan said in the conference call: “Commerce is at an inflection point. Technology-led innovation…is changing the way people shop. Retail is becoming multichannel, and merchants of all sizes must keep up with changing consumer behavior. They have been reaching out to us for help, and we are responding.”
This is not to say that eBay isn’t a great company with a solid balance sheet that is growing earnings, or that it isn’t changing with the market. It is. However, it is no longer the hyper-growth stock it once was because its business model and its market have fundamentally changed. Thus, earnings growth has contracted, and so has eBay’s P/E multiple.
So do I suggest selling the stock? If you’ve allocated part of your diversified portfolio to growth stocks, and you are still thinking of it as a growth stock, then either move it into the stalwart category or sell it. It’s fully valued at 16x earnings, with a projected five-year growth rate of 12%. So yes, it should provide a modest return going forward, but don’t expect more than that.
Lawrence Meyers does not own shares of any company mentioned.