eBay: No Longer a Disruptor, Is It a Sell?

The earliest days of eBay (NASDAQ: EBAY ) were extraordinary. Its business
model was disruptive it created a market that monetized everyones 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 shoppers dream, and the idea that a market existed
where you could not only sell something you didnt 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 whats 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, its a direct competitor right
from the start. That doesnt 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 doesnt 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 isnt a great
company with a solid balance sheet that is growing earnings, or that it isnt
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 eBays P/E multiple. So
do I suggest selling the stock? If youve 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. Its 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 dont expect more than that. Lawrence
Meyers does not own shares of any company mentioned.