Description

eBay: the next trillion-dollar AI powerhouse e-commerce megacap!

Many people look at eBay and think it is a messy, inferior alternative to shopping on Amazon.  I disagree. I see a potent anti-inflationary force - I’m amazed at how often I find something I need at a specialty dealer, then find it a little cheaper & easier on Amazon, then, spending only a few more seconds searching- find it at yesteryear prices on eBay.  The eBay fraud risk has all but been eliminated and the savings compensate you for the only 2 psychological advantages Amazon has over eBay: (1) easy return policy and (2) instant delivery.  What is really exciting and is not priced-in to the stock at all (1) a potential new payment platform touching 130+ million active e-commerce users and (2) efficiencies gained from AI.

Let’s start with what we got - the brand!

You have some doo dad that you don’t need but it is a little too good to throw away.  What are you going to do with it?  Put it on eBay!  eBay has become a household name for disposal of the unwanted yet the valuation of the company is that of something like a toxic coal mine.  But it is not…here we have an established tech company with 70% gross margins, a massive buyback, an established value proposition and potential upside from either AI and/or a new payments platform.

Look at how the valuation stacks up right now to other e-commerce platforms:

Exhibit 1:  relative valuation. 

Investors and analysts complain that eBay’s revenue is not growing and their margins are under attack. I will talk about that but first here is why I don’t care.    Just give me more of the same and in 10 years I’ll be happy.

 Exhibit 2: eBay is running out of shares.  Get some before it is too late.

At least 10% of the shares are going to be removed from the marketplace in the next year.  Ebay is looking at $2 billion in cash proceeds from eBay Classifieds (on top of the core business which brings in $1+ billion fcf per year) and has promised to return the money to owners. When that bid hits the market who is going to sell? From a quick glimpse of ownership and a survey of those around me, I have found nobody taking large, overweight positions in eBay. There is no hot money here.  There is no optimism.  Traders are not waiting on the eBay ETF.  Ebay owners have low expectations and are slow money.  They have given up on it ever becoming a glamour story and they laugh at my AI headline.  The largest holders are Vanguard, Blackrock and State Street (25% of the shares are held by passive indexes). Of the top 30 institutional owners of eBay, 17 of them are even more invested in Amazon than they are eBay, and are likely just riding the e-commerce industry trend.  The current holders are seasoned and/or oblivious.

Why is eBay being avoided.

What can anyone say about the flat revenue?  In their defense, they do not hold any inventory.  Thus, the amount of revenue they book is their take from what other people sell on the platform.  Thus, their transactions are a much higher dollar value than they seem so when you compare them to Amazon, you are not comparing apples to apples.  They are constantly adjusting take rate and that does directly impact revenue.  It is conceivable that AI would allow them to optimize take rate for each category and even each buyer.

It is helpful to Zoom out a bit to see the history of their revenues: 

Exhibit 3:  eBay revenues flat for the last decade.

Their revenue is just their cut of the gross merchandise volume… which is actually much worse:

Exhibit 4:  Annual gross merchandise volume.  In 2022 the $ volume of transactions on eBay were lower, but their take made up for it.

Gross merchandise volume is not keeping up with other e-commerce platforms and indeed had a terrible 2022. I think this is the best explanation of why the stock is down 50% from all-time high. They’re losing e-commerce market share. I’m always amazed at how Mr. Market focuses on near term trends and extrapolates the demise of the underlying business.  It happened with Michaels and Sprouts.  Who cares about a couple soft years with your store basket, your same store sales, your eyeballs on the screen, etc. when the company is spouting just as much cash as it always has and plowing said cash into a buyback - give them a little time!  What these companies have in common is this situation: terrible metrics that pushed valuations into absurdity.  When this happens the buyback becomes all the more effective.

But before we get to AI, there is a ray of hope on the horizon:

Exhibit 5:  Quarterly gross merchandise volume appears to have stabilized

Zooming in a bit, when we take a look at quarterly gross merchandise volume we see it seems to have stabilized. Can they build on this?  maybe but I don’t care - just keep throwing off the cash please.

AI and ChatGPT-like technology:

It is possible, and certainly not priced, that AI and ChapGPT-like technology will make eBay more useful and do a better job of bringing buyers and sellers together.  There can also be improvement in learning about customers and sorting out each customers unique situation.  On Amazon we see “customers who bought this also bought… “ Simple ideas like that could go a long way on eBay. Already eBay has learned what I collect and for what I shop.  It puts new items on the front page. I think this can only get better.  eBay is an established brand that allows consumers to sell directly to other consumers.  If some AI bot can make that cleaner then the platform will be a better place.  The trust that eBay has built with buyers and sellers from a multi-decade e-commerce history is unlike any other platform.  Personally, my ratings as a buyer and seller originate from transactions I made 25 years ago.

My vision for the future of online shopping:

Me:  “I need a new alternator for my yanmar”

Bot:  “what is the model number and year of your engine?”

Me:  “You know what kind of boat I have.  Same old engine.”

Bot:  “Given what a success you are at stock-picking I thought by now you’d have a bigger boat.  Still a 4JH45, 2019?  For the alternator do you want original equipment or an upgrade?”

Me:  “Original”

Bot:  “Niemiec Marine has it for $303 plus $26 shipping and tax. Diesel engine parts are all they sell and they might offer you some phone support but they have a no return policy.  Niemiec is an authorized Yanmar dealer.  You don’t get a warranty if you install it yourself.  A seller on eBay has a new one for $258 shipping and tax included, 30-day return policy.  It is from a seller who has sold numerous marine spare parts and has a 13 year track record on eBay.  100% perfect feedback.  Don’t forget you’ll get 258 eBay points.”

Me: “It sounds like you think I should chose eBay?”

Bot:  “Yes, this time eBay has the superior value proposition.

Me:  “Make it so.”

Bot:  “I put it on your Visa.  It will arrive Tuesday.”

Me:  “Don’t tell my wife.”

R&D

Consistent with that expected improvement is the huge R&D investment eBay is making.  Before I show you how their R&D spend has increased, remember that R&D is expensed. This is a cost that is supposed to benefit eBay in the future.  Ebay spent $1.4 billion on R&D last year but it is for some future benefit.  Had this been an oil company, they would’ve capitalized a cost such as this that “may” benefit them in the future.  Had eBay capitalized the $1.4 billion R&D spend, the stock would trade at 7x earnings multiple which is cheaper than the energy sector trades at now(fyi 9.6x).

Exhibit 6:  eBay R&D

Let’s say you want to make an investment in AI because you liked my chatbot example above.  Nvdia is a market leader in AI and has a market cap of $1.5 trillion.  They are spending about $8 billion this year on R&D - I guess for AI stuff?  So, when you buy a share of NVDA stock for $600, you’re buying ~$3 in current period AI R&D investment.  When you buy a share of eBay stock for $40, you’re also buying ~$3 worth of current period AI R&D investment.

Exhibit 7: eBay is investing in the future

Another potential upside:  Financial services.

I’m not banking on this (no pun intended) but let’s look at the history here.  Ebay bought PayPal for $1.5 billion in 2002.  It built it up and spun it off where it initially achieved a $44 billion market cap in 2015 (a nice return for eBay shareholders).  For the life of me I can find no signs of Paypal’s existence on eBay right now.  eBay has quietly been offering eBay bucks (like frequent flyer miles), eBay credit cards, etc.  I haven’t touched my PayPal account in long time.

There’s a controversial website and blog (https://www.ecommercebytes.com/) that posts dirt on eBay.  The posters seem like active users and seem very knowledgeable, so much so that eBay got in quite a bit a trouble confronting them.  Anyway, one post caught my attention:

Exhibit 8:  Gossip about new financial services company from industry blog

Risks:

R&D spending doesn’t materialize into anything useful.

Business deteriorates.

Summary: 

Ebay is a part of our life.  It has a multi-decade track record.  People who buy & sell on eBay have a multi-decade track record. It trades at an attractive valuation.  It could benefit from AI or a new payments platform.  It is buying back shares (and it pays you a dividend). 

Catalyst

buyback

dividend

AI