netrashetty
Netra Shetty
Financial Analysis of eBay : eBay Inc. is an American Internet company that manages eBay.com, an online auction and shopping website in which people and businesses buy and sell a broad variety of goods and services worldwide. Founded in 1995, eBay is one of the notable success stories of the dot-com bubble; it is now a multi-billion dollar business with operations localized in over thirty countries.[3][not in citation given] eBay expanded from its original "set-time" auction format to include "Buy It Now" standard shopping; shopping by UPC, ISBN, or other kind of SKU (via Half.com); online classified advertisements (via Kijiji or eBay Classifieds); online event ticket trading (via StubHub); online money transfers (via PayPal[4]) and other services.
Short Term Liquidity Analysis
Our analysis of the financial state of eBay begins with the short term liquidity
analysis. The ratios shows either eBay’s existing ability to meet their short term
obligations with cash holdings or the speed at which eBay can transform current assets
into cash.
Short-term liquidity 2001 2002 2003 2004 2005 2004 2005
Current ratio 4.906 3.802 3.315 2.683 2.144 1.567 1.518
Acid-test ratio 4.580 3.551 3.133 2.190 1.796 1.098 1.179
Accounts receivable turnover 8.869 10.414 12.118 14.018 16.153 41.886 35.899
Days' sales in receivables 41.155 35.047 30.120 26.038 22.596 8.714 10.168
Working capital 703,666 1,082,234 1,498,606 1,826,279 1,698,302 918,996 1,000,000
eBay Amazon.com
Current and acid-test ratios
The ratios show that eBay is having a steadily declining holding of cash or cash
and available-for-sale securities compared to the liabilities they face within one year.
However, they still have about twice the amount of short term assets, compared to short
term liabilities. The current ratio is much higher than Amazon.com’s.
Despite the fact that current liabilities have been growing at about twice the rate
of current assets, we view the current levels to be adequate and, perhaps, a more natural
level than previously as ratios of 5 can be regarded as very high indeed. Generally we do
not think the ratios are a cause of alarm at present, although it will be something to pay
attention to in the future if the trend should continue.
Accounts receivable turnover and Days’ sales in receivables
The ratios show how effectively eBay is at collecting the outstanding debt. The
turnover ratio has virtually doubled over the five years. This, in turn, implies that Days’
sales in receivables would be halved. This means that eBay is receiving cash much faster 12
than previously. This would be natural as many transactions are executed with immediate
cash settlement between the trading parties. However, many of the major traders have
accounts settled monthly. Amazon.com is currently proving much more efficient when it
comes to collecting receivables.
Capital Structure and Solvency
Capital structure and long-term solvency 2001 2002 2003 2004 2005 2004 2005
Total debt to equity 0.137 0.121 0.170 0.175 0.161 N/M 14.024
Total debt ratio 0.120 0.108 0.145 0.149 0.139 1.070 0.933
Long-term debt to equity 0.013 0.014 0.040 0.016 0.015 N/M 6.183
Financial leverage ratio 1.137 1.121 1.170 1.175 1.161 N/M 15.024
Financial leverage index 1.055 1.148 1.172 1.178 1.164 N/M 22.432
eBay Amazon.com
Serving as a measure of the long term financial state of the company, the capital
structure and solvency ratios gives further insight to the risk associated with eBay. The
ratios comparing external financing to stockholders equity are fundamental in the overall
risk associated with investment in the company and as such are important determinants of
the required rate of return of both stockholders and issuers of debt.
An important element is to determine if the current capital structure is optimal.
This is determined by the trade-off between taking advantage of the tax shield by issuing
high amounts of debt and the potential for entering financial distress.
Throughout the period eBay has eliminated the long term debt completely. At the
same time stockholders equity has increased continuously due to high positive earnings.
Most of eBay’s debt is due to short-term liabilities which, as we saw before, are easily
covered by current assets. However, deferred taxes have increased over the years.
Although a financial liability, deferred tax will remain on the balance as one year’s
deferred tax is replace by the next in perpetuity and can be viewed as a permanent form
of financing that for a going concern will never be fully repaid. This is also why we view
half of deferred tax as an asset. We choose half due to possible future fluctuations in the
size of deferred taxes.
With only 14 percent debt and 86 percent equity eBay has very little long-term
financial risk. In fact, we view the current capital structure not to be optimal. eBay 13
would, in our opinion, benefit from taking on much more debt thereby increasing benefits
of the tax shield to yield higher returns to their owners. Another ratio is the financial
leverage. This ratio measures assets to equity. For every dollar of equity eBay has about
$1.16 in assets, meaning they borrowed $0.16.
Amazon’s capital structure is almost exactly reverse with heavy debt financing
compared to an almost non-existing stockholders equity only gone positive this year.
CurrentlyAmazon.com is financed with 93.3% debt, though this is an improvement from
last years 107%.
Asset Utilization Analysis
Ratios of turnover are closely related to profitability analysis. We will now look at
some of the key asset utilization ratios.
Asset utilization 2001 2002 2003 2004 2005 2004 2005
Sales to receivables 8.869 18.472 19.171 27.164 28.207 41.886 35.899
Sales to working capital 1.206 1.360 1.678 1.968 2.583 15.046 8.848
Sales to fixed assets 5.598 6.738 5.282 4.988 6.024 29.424 28.578
Sales to total assets 0.530 0.426 0.439 0.474 0.460 2.558 2.432
eBay Amazon.com
Sales to receivables are increasing throughout the entire period. This means that
accounts receivable has increased at a lower pace than sales. This in turn means that eBay
has tightened its receivable policies during the period as sales increased at a higher rate
than receivables. Throughout the period eBay’s sales to receivables ratio is coming at par
with Amazon.com who has seen a decline between 2004 and 2005.
Sales to fixed assets shows how successful eBay is using fixed assets in
generating sales. EBay has improved this ratio slightly this year compared to 2001. The
large drop between 2002 and 2003 was due to heavy investments in property and
equipment, especially computer equipment and software as well as land, buildings and
improvements. The increase between 2004 and 2005 was due to the pace of revenue
increases. Amazon.com’s ratio is much higher than eBay meaning that they are much
more efficient in generating revenue from their fixed assets. 14
Likewise Sales to total assets indicates how the usage of all assets drives sales.
Here, however, eBay shows a declining trend as sales growth is less than the increase in
assets.
Operating Performance
We now turn to the income statement to measure the profit margins of eBay
Operating performance 2001 2002 2003 2004 2005 2004 2005
Gross profit margin 0.820 0.824 0.808 0.812 0.820 0.231 0.240
Operating profit margin 0.188 0.292 0.291 0.324 0.317 0.064 0.051
Net profit margin 0.121 0.206 0.204 0.238 0.238 0.085 0.042
eBay Amazon.com
The gross profit margin has been very stable during the period at 82 percent of
sales. This must be considered a high margin, much higher than Yahoo’s. However,
unlike a production company most of eBay’s costs are not variable costs but rather
operating expenses. Contrary, Amazon.com’s business model has a high degree of Cost
of Sales and achieves a gross profit margin of only 24% in 2005. It is noticeable that not
only is eBay’s gross profit margin more than three times higher, but even after all eBay’s
expenses are considered their net profit margin is barely surpassed by Amazon.com’s
gross profit margin in 2005 and even higher in 2004.
The majority of costs are captured in the operating profit margin. This margin has
increased over the period as gross profit margin has grown much more than operating
expenses, only the relatively small expenses of payroll and amortization increased faster
than gross profit margin whereas heavy expenses such as marketing, general and
administrative and product development all grew by less. EBay’s operating profit margin
is also much higher than that of Amazon.com. The pattern repeats itself in the net profit
margin. Out of every $100 of revenue, Amazon.com only earns about $4.20, about six
times less than eBay.
The growth in eBay revenues was driven by strong growth rates in both the
United States and internationally. Between 2002 and 2005 total revenues in the US grew 15
from $0.718m to $1.737m or a total growth of 142% in three years. For the same period
international sales grew from $0.297m to $1.665 or 461%. These revenue gains were
achieved through continuous strong growth.
Development in accounts
(in millions) 2,001 2,002 2,003 2,004 2,005
Confirmed registered users 42 62 95 136 181
% change 45.5% 53.8% 42.8% 33.3%
Active users 18 28 41 56 72
% change 55.6% 48.7% 36.2% 28.0%
Number of non-store listings 419 630 955 1,340 1,690
% change 50.3% 51.7% 40.3% 26.1%
Number of stores listings 4 9 16 73 187
% change 115.0% 86.0% 354.4% 157.5%
Gross merchandise volume 9,319 14,868 23,779 34,168 44,299
% change 59.5% 59.9% 43.7% 29.7%
Total accounts 23 40 64 96
% change 73.0% 58.3% 50.8%
Active accounts 8 13 20 28
% change 67.1% 53.0% 39.1%
Total number of payments 39 230 340 481
% change 486.2% 47.9% 41.4%
Total payment volume 2,138 12,226 18,915 27,485
% change 472% 55% 45%
The growth rates in all categories throughout the period have been quite
impressive, though they also show a clear trend of declining growth.
Cost of net revenues is at present the same percentage of revenues as in 2001
though it has been declining since 2003. This development is primarily due to lower
eBay's traditional auction business model differs from typical e-commerce merchants. For instance, eBay provides only technology platforms and tools for e-commerce and does not have inventory like Amazon, a leading e-commerce retailer. As a result, eBay is a highly profitable company with a 16.7% operating margin in 2009,[3] in comparison to Amazon, which realized an operating margin of 4.6% that year.[4] As an e-commerce company with significant international presence, broad product category offerings, and many different technology platforms (e.g., auctions, classifieds, payments, VoIP), eBay attracts a lot of competition.
The company's growth rate has slowed since its early years as the company faces fierce competition, changes in customer behavior and expectations, and high levels of real and perceived fraud. eBay's success going forward depends on its ability to respond to growing buyer and seller dissatisfaction.
Company Overview
Business Metrics
eBay Historical Performance[5]
2006 2007 2008 2009
Total Revenue ($thousands) 5,969,741 7,672,329 8,541,261 8,727,362
Net Income ($thousands) 1,125,639 348,251 1,779,474 2,389,097
Operating expenses ($thousands) 3,289,993 5,296,177 4,237,510 5,296,177
2010 First Quarter Earnings
eBay reported its 2010 first quarter earnings on Wednesday, April 21 2010. eBay's revenue for this period was up 9% from the year-ago period to $2.21 billion. This increase was primarily due to growth in the Payments and Marketplaces business. The Payments business' revenue increased 26% to $809.3 billion. The Marketplaces business saw its revenue increase by 13% to $1.4 billion.[6]
2010 Second Quarter Earnings
In the second quarter of 2010, eBay's revenue increased 6% to $2.2 billion. This increase was primarily due to PayPal, which added 1 million new accounts each month during this quarter. Paypal's revenue increased 22% from $669 million to $817 million. However, with half of eBay's revenue coming from abroad, the weak Euro is expected to reduce this year's revenues by $250 million. [7]
2010 Third Quarter Earnings
In the 3rd quarter of 2010, eBay's revenue increased 1% to $2.25 billion. Excluding Skype, which it had sold at the end of last year, eBay's revenue increased 10%. This growth was primarily fueled by its online payments business, whose revenue increased 22% to $838 million. Total payment volume increased 26% to $22.37 billion. Marketplace revenue rose 3% to $1.41 billion. Gross merchandise volume increased 3% to $12.59 billion. The number of active eBay users also rose by 4% from 89.2 million a year-ago to 93.2 million. eBay's net income increased 23% from $350 a year ago to $432 million.[8]
2010 Fourth Quarter Earnings
Revenue increased 5% to $2.5 billion in the fourth quarter, due to a stabilization of its Marketplace business and an increase in its online payments business. Payments business revenues, which include PayPal and Bill Me Later, grew 25% to $795.6 million. PayPal finished the fourth quarter with 94.4 million active accounts, approximately growing by 1 million accounts per month. Gross merchandise volume increased 24% to $14.2 billion.[9]
Business Sectors
eBay divides its business into three main units. The business models for each are:
Marketplaces: eBay Marketplaces generates revenue by charging sellers a listing fee based on either the starting or reserve price of the auction, as well as a closing fee derived from the final sale price using a sliding scale. Additional features (such as Buy It Now, or tools to enhance the appearance of a listing) carry additional fees. In August 2008, eBay announced new pricing for listings that use the "Buy It Now" feature, which offers buyers a fixed price for the item on sale. The price reduction will charge sellers 70% less in fees. By encouraging sellers to use their Buy it Now feature, eBay is attempting to increase total listings and take some market share from competitor Amazon.com.[10] The core eBay business is the most profitable, maintaining an estimated 30-35% operating margin.
Payments: PayPal charges a $0.30 flat fee per transaction received, as well as a variable percentage (4.9%, or 1.9 to 2.9% for Premier and Business Accounts). There are also fees for cross-border transactions. PayPal runs at an estimated 20-25% margin.
Communications: Skype generates revenue through fees associated with calls from Skype to outside lines (SkypeOut), and vice versa (SkypeIn). There are additional fees for international calls, voicemail service, and other features such as ringtones. Like PayPal, Skype generates an estimated 20-25% margin.
Marketplace
The Marketplaces unit encompasses all of eBay's online storefronts and e-commerce offerings. eBay's core marketplace consists of their traditional auction format, fixed-price listings through eBay's Buy-It-Now feature and through Half.com, and eBay Stores, which allows sellers to display all their listings and describe their businesses with customized web pages.
eBay Marketplace added over 41 million new users in 2006, and had 82 million active users at the end of the year, up from 72 million at the end of 2005 (these figures imply a churn of 31 million users who became inactive during the same time period). Users accounted for $52 billion worth of goods traded overall during the year, a metric that eBay calculates as gross merchandise volume (GMV). It is important to note that Marketplaces is a trading platform and the company does not manage any inventory of goods, unlike Amazon.com, another e-commerce leader.
Marketplaces also includes:
Shopping.com, a comparison shopping website
Rent.com, which provides listing services for apartment owners and prospective renters
Various classifieds sites throughout the world, including Kijiji (various countries), LoQUo.com (Spain), Marktplaats.nl (Netherlands), mobile.de (Germany), and a minority holding in Craigslist, Inc (various).
eBay's holding in Craigslist, a widely popular personal advertisement web-based company, came into the news in the spring of 2008. Ebay sued Craigslist owners, on the grounds that the owners made plays to dilute Ebay's holding in Craigslist by issuing new shares. In response Craigslist has filed a lawsuit against Ebay with many allegations, but focused on Ebay's alleged attempts to use its position as a minority shareholder to its own advantage.[11]
eBay thus far has thrived on its ability to bring buyers and sellers together with a lower fee structure than other systems, and has proven most effective with markets involving new, scarce goods, out-of-season or end-of-cycle merchandise, and used and vintage items. The company intends to continue growth in their Marketplaces unit by continuing to improve user experience.
Marketplaces Operating Data[12]
2006 2007 2008
Gross Merchandise Volume ($M) $52,474 $59,353 $59,650
% Yearly Growth, GMV 13% .5%
The launch of eBay Express--a more traditionally structured e-commerce site with new merchandise and fixed pricing--is an attempt to reach existing users who may be dissatisfied with eBay's core auction format. eBay also plans to continue expansion into new areas and geographies, as represented by their development of alternate markets outside of the eBay format such as classifieds and Shopping.com.
Net Revenues by Segment[5] ($M)
2006 2007 2008 % Change 06-07 % Change 07-08
Marketplaces $4334 $5364 $5587 24% 4%
Payments $1441 $1,926 $2,403 34% 25%
Communications $194 $382 $551 96% 44%
Total $5,970 $7,672 $8,541 29% 11%
Payments
The Payments unit consists of PayPal, which eBay acquired after the failure of their own online payment system, Billpoint. The PayPal business model builds on the existing structure of bank accounts and credit, while allowing buyers to share only their email addresses with sellers, and providing sellers with lower transaction fees than traditional services such as credit cards.
The acquisition of PayPal has given eBay a payment service it can integrate into nearly all of its other offerings, as well as expand to reach transactions outside of eBay. This also gives them full oversight over the eBay experience from listing to purchase, and gives the company greater ability to defeat potential fraud. In 2008, PayPal processed $60 billion in total payment volume. It has over 70 million active account holders and is accepted in 190 countries and 19 currencies.
eBay plans to expand PayPal by increasing its integration with and penetration into its Marketplaces segment, as well as continue to grow its global presence and expand into off-eBay markets, as with its recent partnership with Yahoo. PayPal is also focusing on improving user experience, largely by addressing perceived issues with security.
Communications
In October 2005 eBay acquired Skype, currently the most popular carrier in the expanding Voice over Internet Protocol (VoIP) market. Skype boasts 405 million users worldwide, is available in 28 languages, and boasted revenues in 2008 of $551MM. Although initially rumored that eBay had acquired Skype to integrate the VoIP calling technology into its core marketplace business, this integration never came to fruition. As of early 2009, eBay was reportedly exploring options to spin Skype back out.
Skype's current growth strategy involves working with device partners to gradually eliminate the need for a computer to make calls, as well as finding ways to integrate the segment with its other business units. The company is also exploring ways to increase monetization and encourage its users to use premium offerings. A recent development toward that end is the introduction of Skype Prime, which allows users to charge incoming callers on a per-call or per-minute basis.
Trends and Forces
International Expansion
eBay also has a considerable international presence, with listings outside of the United States accounting for 55% of net Marketplaces revenue in 2009. Growth in Germany and the United Kingdom, eBay's largest international markets, has begun to slow recently; however, other booming markets, such as France and Korea, have continued to fuel international expansion, where growth in both revenue and number of listings internationally has consistently outpaced that of the US Marketplace. However, eBay has also seen its share of trouble overseas: it withdrew from Japan in 2002 after losing the market to Yahoo, and recently changed strategies in China, entering a partnership with TOM Online in 2006 and retaining only 49% ownership.
eBay International[13]
United States International
Net Revenue 2006 ($M) 3,109 2,860
Net Revenue 2007 ($M) 3,743 3,930
% Change 20% 37%
Net Revenue 2008 ($M) 3,969 4,572
% Change 6% 16%
Declining growth and user activity
eBay is currently experiencing a decline in the growth of its auction services, which make up the core segment of its marketplace. Average Selling Prices (ASPs) have been decreasing, and growth of Gross Merchandise Volume (GMV) in the US trails that of domestic e-commerce overall. This decline has been alleviated somewhat by accelerating growth in eBay Motors, a marketplace for cars. There has also been a slight recovery in conversion rates (the ratio of site visits to goods ordered).
Cost of doing business is becoming more expensive with a 77% increase in the cost of net revenue between FY06 and FY08. An increase of 9% was seen between the 1st quarters of FY08 and FY09. Such a high increase in cost of revenue is a concern as this makes the company less profitable, even with growing sales and as this increase has been caused by increased cost of customer service along with site operation costs, it would be extremely difficult to lower these while maintaining the same level of service.[14][15]
Decreasing buyer satisfaction
As the e-commerce field continues to develop, eBay has begun to lag behind the competition in certain key features.
Search: eBay's search engine is far less sophisticated than Google or Yahoo, using a simple unranked keyword system that allows sellers to describe their products with any number of keywords that may not even be related to the product.
Buyer Confidence: Less scrupulous sellers operate a number of scams on eBay, with some of the biggest including spamming or phishing bidders on big-ticket items, which drives away some of eBay's most valuable spenders; fake or counterfeit products, particularly in designer goods, to the point where many buyers may assume all listed items in certain categories are fake; and bait-and-switch tactics using high shipping fees to disguise the total costs for an item. Louis Vuitton and Dior Couture recently filed a suit against eBay, claiming that not enough is being done to prevent the sale of counterfeit items.
Checkout: Most e-commerce sites use a shopping cart system, where users select any number of goods they want to purchase, then check out by entering their information, with credit cards generally available for use. Amazon.com (AMZN) and Google Checkout attempt to push this even further, with their one-click models attempting to move towards enabling purchases with a minimum of user input. By contrast, eBay uses a more complicated system requiring login, and payment options can differ and be limited by the seller. PayPal alleviates the need to enter user information, but requires another separate login and, for new users, sign-up for an entirely separate service.
The launch of eBay Express (EE) is an attempt to reach its users who are dissatisfied with the core eBay model. EE uses a more standard e-commerce model, with a better search system and more standardized requirements for sellers. The company hopes it will also help them capture the new-and-in-season category of merchandise, not one of its traditional strengths. However, because EE shares the eBay branding, the company may have trouble selling it to disenfranchised users who already have a negative brand association. Further, since the company is targeting current users, it may cannibalize existing sales rather than generating new growth.
Some of eBay's other current attempts to improve the buying and selling experience and address user concerns include MyWorld, which provides seller info and a space for seller blogs, Deal Finder, a search for low-price auctions nearing close, and seller product reviews. eBay recently introduced their Feedback 2.0 system, which provides more detailed feedback information broken down over several categories, and provides buyers with anonymity to allow honest feedback without fear of negative Feedback rating retribution. The company has also begun favoring listings with lower shipping fees, though this feature has drawn criticism from sellers, who report higher conversion rates on listings with lower sale prices and higher shipping fees.
Decreasing seller satisfaction
eBay charges sellers both a flat listing fee and a closing fee based off of a sliding percentage of the final auction price. Because of the fixed cost of listing, recent drops in ASPs and conversion rates can represent, on average, a 2-3% hit to margins, with the listing fee representing a higher percentage of the closing price. Drops in ASPs will therefore affect sellers, who are generally estimated to operate with margins between 5 and 12%, much more than it affects eBay, which generates a 33% overall operating margin.
Many of eBay's largest volume sellers are establishing proprietary storefronts off of eBay, which can potentially offer them lower levels of fraud, greater customer ownership, and more repeat business. There is also increasing interest in competing solutions: Amazon Marketplace's payment system offers superior fraud protection, and Google Base, which offers listings integrated with Google, Froogle, and Google Maps searches, is gaining traction with sellers. These moves are not necessarily an attempt to move off eBay entirely, but rather to increase profitability, particularly in the face of a slowing Marketplace.
Replacing low-quality inventory
eBay has recently identified “rebalancing the Marketplace” as a priority, and its major initiatives towards that end have included the launch of eBay Express, and an increase in Stores Inventory Format pricing. However, there seems to be something of a divide between the interests of sellers and the plans of management—sellers are concerned over the declining number of buyers and lower conversion rates, which management seems to attribute to a need for rebalance, rather than reevaluation, of its auction business.
Management felt the previous low pricing for eBay Stores had sellers using eBay to list goods of almost any type or value, filling eBay with commodity goods at near-MSRP pricing, diluting the shopping experience and discouraging value-hunting eBay users. The rate increase on Stores listings, which was enacted in August 2006, was an attempt to push low-quality inventory out of the system, while driving attractive goods back to the Core marketplace. However, analysts and sellers both feel that the shift towards Stores was not due to lower pricing, but instead a result of the declining growth in the core marketplace, which rate increases will do little to stimulate.
On-site advertising: cannibalization?
eBay recently entered partnerships with both Yahoo! (YHOO) and Google (GOOG). Yahoo is now the exclusive third-party provider of all domestic graphical advertisements on eBay, provides sponsored search results, and offers a co-branded browser toolbar. Yahoo has also increased its integration between PayPal and its own services. Google has become the exclusive provider of text-based advertising on eBay's international sites. An international provider for graphic ads has not yet been determined.
Partnering with two of the Internet's largest driving forces seems to be a practical move for increasing traffic and monetization. However, these text-based ads and sponsored searches may compete with eBay's own listings, particularly as Google continues to develop Google Base, its own listings service. This competition also goes the other way, as eBay is a major purchaser of advertising keywords from Google. Yahoo recently exited the auctions market in the United States, but is still a major competitor overseas, particularly in east Asia, where it pushed eBay out of Japan in 2002. Finally, the fact that advertisements from Yahoo and Google may monetize some of eBay's pages better than eBay itself casts some aspersions on the strength of eBay's current search and listings model.
The growing rivalry between eBay and Google (GOOG) hit a new level recently, when Google planned a Google Checkout "celebration of user choice" party to directly compete with eBay's biggest promotional event of the year. In response, eBay announced it was pulling all advertisements from Google's AdWords service. In the end, Google canceled its party, and eBay resumed using AdWords, albeit with plans to explore alternatives such as Yahoo, MSN, and Ask.com.
Competition
eBay does not have major head-to-head competitors but faces fierce and growing competition in every business segment. Its Marketplace offerings directly compete with other e-commerce sites, including e-commerce giant Amazon.com (AMZN) and specialized sites such as Blue Nile (NILE), which sells diamonds, Autobytel (ABTL) and AutoNation (AN), both of which sell cars online, and Overstock.com (OSTK), a variety e-commerce retailer.
While eBay competes against a number of online retailers in its most prominent categories, many traditional retailers are also putting increasing focus into their online storefronts. eBay's core marketplace faces direct international competition from such competitors as Korea's Daum and Gmarket (which is partially owned by Yahoo).
Amazon is a large competitor that offers a wide variety of merchandise on its site, including books, DVDs, kitchenware and electronics. While the company operates a business model with a significant network of inventory warehouses (eBay has none), Amazon is expanding further into eBay's traditional territory, connecting individual buyers and sellers on its Amazon Marketplace, and offering sellers inventory management and fulfillment with Amazon Services.
PayPal is currently a dominant presence in electronic payments with no real competitors, but it faces growing pressure from Google Checkout, which has generated considerable interest due to the Google brand, integration with Google's other offerings, simplified checkout system, and ease of use with third-party software. Amazon launched its Amazon Payments platform in 2008. Microsoft is also attempting to reenter the field, having failed previously with its Passport service.
The VoIP field is expanding very quickly, and Skype competes directly with Vonage and Net2Phone, as well as traditional service providers like Comcast who are attempting to enter the market. In the corporate sector, Skype competes with Avaya and Cisco, which have an entrenched presence, as well as Microsoft, a newcomer to the market.
Finally, all three segments compete with standard forces in their respective markets, such as brick and mortar retailers, traditional credit card services, and local telephone service providers, respectively.
payment processing costs as a percentage of total payment volume in the payments
segments as compared to prior years. However, the company does foresee that cost of net
revenue will increase in 2006 both in absolute terms as well as in percentage of revenues
primarily due to the Payments and Communications businesses, each of which has a
lower gross margin than the traditional marketplace businesses.
During the period virtually all operating costs declined as a percentage of
revenues. Especially sales and marketing saw higher efficiency, but also product
development became a declining function of revenues. Again, the company does foresee
that 2006 will see increases in absolute and relative terms due to the acquisition of
Shopping.com. 16
The Altman Z-score
Z = 0.717X1 + 0.847X2 + 3.107X3 + 0.420X4 + 0.998X5 = 3.676
The purpose of the Altman Z-score is to make an assessment of the probability of
bankruptcy. A company with an Altman Z-score less than 1.20 is considered to have a
high probability of bankruptcy. Contrary a score of 2.9 or above is considered to have a
low probability of bankruptcy. Between 1.20 and 2.90 is viewed ambiguously. A total
score of 3.676 implies that eBay shows a low probability of bankruptcy. Despite
Amazon.com’s poor earnings margins they maintain a Z-score of 2.835 and is therefore
also considered relatively safe.
Return on Invested Capital
Return on investment 2001 2002 2003 2004 2005 2004 2005
Return of assets (ROA) 7.07% 8.73% 8.86% 11.27% 10.96% 24.37% 12.09%
Disaggregation of return on common equity 0.073 0.098 0.105 0.132 0.127
Adjusted profit margin 0.121 0.206 0.204 0.238 0.238
Asset turnover 0.530 0.426 0.439 0.474 0.460
Financial leverage ratio 1.137 1.121 1.170 1.175 1.161
Return on common equity (ROCE) 7.45% 10.01% 10.39% 13.27% 12.77% N/M 271.16%
Equity growth rate 7.45% 10.01% 10.39% 13.27% 12.77% N/M 271.16%
eBay Amazon.com
Return on Assets
The return on assets is an important ratio in measuring how effectively
management is running the company and their ability to generate profits from the assets.
From the above table we can see continuous growth with the exception of the last year.
The strong growth in revenues is the underlying cause of this increase. Amazon.com does 17
achieve noticeable higher returns on their assets, it should be noted that their assets base
is much lower than eBay’s.
Return on Common Equity
This ratio measures shows the return on the common stock and therefore states
the return from a shareholder perspective. Since eBay does not paid dividends ROCE will
equal the Equity Growth Rate. As the case of ROA, the ROCE also show increases in
return with the exception of the last year. Amazon.com achieves remarkable returns on
their equity again, however, it should be noted that the cause is a very small equity base,
in fact only in 2005 did Amazon.com experience a positive equity of $246 million (as
opposed to eBay’s massive $10 billion). The negative equity which was due to high
accumulated losses meant that the ROCE was not meaningful prior to 2005.
Disaggregating the ROCE we can see that the financial leverage ratio remains
constant between 2001 and 2005, while the asset turnover decreases. The main reason for
the increase in ROCE is therefore due
Comparison
Since the purchase of the eBay shares in 2003, the financial ratios of eBay has
shown a clear trend of noticeable improvements within debt-ratios, return on
assets/equity, margins and receivables. On the other side eBay has seen decline in sales to
asset and current and quick ratios, although it should be noted that the short-term
liquidity ratios were quite high in 2003.
Today eBay’s financials are stronger than when originally purchased and the
actual income numbers have even exceeded the forecasts made by the recommendation
group which justifies the higher current stock price compared to their calculations.
eBay's (NASDAQ: EBAY) most prominent business is ebay.com, an internet auction site that connects individual buyers and sellers worldwide. Its massive popularity places it as one of the Internet's leading e-commerce sites, and millions of items are sold each day on eBay.com. eBay generated overall revenues around $8.73 billion for FY09, an increase of 2% from $ 8.54 billion reported for FY08. from its three primary businesses: auctions, payments (PayPal) and communications (Skype).[1]
In addition to PayPal and Skype - two businesses that eBay acquired through mergers - eBay has grown beyond its three core businesses by purchasing various companies. These acquisitions have served to expand eBay's business into different regions of the world as well as extend its online auction-based business model. As a result, eBay faces the challenge of integrating these properties with its existing businesses, many of which compete with one another. The company's key acquisitions include, by year:
2005: Skype (VoIP), Rent.com (real estate), Shopping.com (electronics and other merchandise), Verisign's payment gateway, and several classifieds sites[2]
2006: Swedish auction marketplace Tradera.com [2]
2007: Stubhub (event tickets marketplace) and Stumbleupon (search engine)[2]
2008: Bill Me Later (alternative online payment method)[2]
Latest Full Context Quarter Ending Date
2010/12
Gross Profit Margin
78.2%
EBIT Margin
22.9%
EBITDA Margin
31.0%
Pre-Tax Profit Margin
22.9%
Current Ratio
2.4
Quick Ratio
2.3
Leverage Ratio
1.4
Receivables Turnover
2.6
Asset Turnover
0.5
Revenue to Assets
0.4
ROE from Total Operations
11.8%
Return on Invested Capital
10.7%
Return on Assets
8.2%
Debt/Common Equity Ratio
0.10
Price/Book Ratio (Price/Equity)
2.74
Book Value per Share
$11.79
Total Debt/ Equity
0.12
Long-Term Debt to Total Capital
0.09
SG&A as % of Revenue
37.3%
R&D as % of Revenue
9.9%
Receivables per Day Sales
$155.75
Days CGS in Inventory
0
Working Capital per Share
$5.04
Cash per Share
$4.30
Cash Flow per Share
$1.97
Free Cash Flow per Share
$1.49
Tangible Book Value per Share
$6.60
Price/Cash Flow Ratio
16.3
Price/Free Cash Flow Ratio
21.7
Price/Tangible Book Ratio
4.88
Most recent data
5-Year Averages
Return on Equity
11.9%
Return on Assets
8.8%
Return on Invested Capital
11.6%
Gross Profit Margin
80.2%
Pre-Tax Profit Margin
23.6%
Post-Tax Profit Margin
18.6%
Net Profit Margin (Total Operations)
18.6%
R&D as a % of Sales
8.9%
SG&A as a % of Sales
40.0%
Debt/Equity Ratio
0.02
Total Debt/Equity Ratio
0.04
Short Term Liquidity Analysis
Our analysis of the financial state of eBay begins with the short term liquidity
analysis. The ratios shows either eBay’s existing ability to meet their short term
obligations with cash holdings or the speed at which eBay can transform current assets
into cash.
Short-term liquidity 2001 2002 2003 2004 2005 2004 2005
Current ratio 4.906 3.802 3.315 2.683 2.144 1.567 1.518
Acid-test ratio 4.580 3.551 3.133 2.190 1.796 1.098 1.179
Accounts receivable turnover 8.869 10.414 12.118 14.018 16.153 41.886 35.899
Days' sales in receivables 41.155 35.047 30.120 26.038 22.596 8.714 10.168
Working capital 703,666 1,082,234 1,498,606 1,826,279 1,698,302 918,996 1,000,000
eBay Amazon.com
Current and acid-test ratios
The ratios show that eBay is having a steadily declining holding of cash or cash
and available-for-sale securities compared to the liabilities they face within one year.
However, they still have about twice the amount of short term assets, compared to short
term liabilities. The current ratio is much higher than Amazon.com’s.
Despite the fact that current liabilities have been growing at about twice the rate
of current assets, we view the current levels to be adequate and, perhaps, a more natural
level than previously as ratios of 5 can be regarded as very high indeed. Generally we do
not think the ratios are a cause of alarm at present, although it will be something to pay
attention to in the future if the trend should continue.
Accounts receivable turnover and Days’ sales in receivables
The ratios show how effectively eBay is at collecting the outstanding debt. The
turnover ratio has virtually doubled over the five years. This, in turn, implies that Days’
sales in receivables would be halved. This means that eBay is receiving cash much faster 12
than previously. This would be natural as many transactions are executed with immediate
cash settlement between the trading parties. However, many of the major traders have
accounts settled monthly. Amazon.com is currently proving much more efficient when it
comes to collecting receivables.
Capital Structure and Solvency
Capital structure and long-term solvency 2001 2002 2003 2004 2005 2004 2005
Total debt to equity 0.137 0.121 0.170 0.175 0.161 N/M 14.024
Total debt ratio 0.120 0.108 0.145 0.149 0.139 1.070 0.933
Long-term debt to equity 0.013 0.014 0.040 0.016 0.015 N/M 6.183
Financial leverage ratio 1.137 1.121 1.170 1.175 1.161 N/M 15.024
Financial leverage index 1.055 1.148 1.172 1.178 1.164 N/M 22.432
eBay Amazon.com
Serving as a measure of the long term financial state of the company, the capital
structure and solvency ratios gives further insight to the risk associated with eBay. The
ratios comparing external financing to stockholders equity are fundamental in the overall
risk associated with investment in the company and as such are important determinants of
the required rate of return of both stockholders and issuers of debt.
An important element is to determine if the current capital structure is optimal.
This is determined by the trade-off between taking advantage of the tax shield by issuing
high amounts of debt and the potential for entering financial distress.
Throughout the period eBay has eliminated the long term debt completely. At the
same time stockholders equity has increased continuously due to high positive earnings.
Most of eBay’s debt is due to short-term liabilities which, as we saw before, are easily
covered by current assets. However, deferred taxes have increased over the years.
Although a financial liability, deferred tax will remain on the balance as one year’s
deferred tax is replace by the next in perpetuity and can be viewed as a permanent form
of financing that for a going concern will never be fully repaid. This is also why we view
half of deferred tax as an asset. We choose half due to possible future fluctuations in the
size of deferred taxes.
With only 14 percent debt and 86 percent equity eBay has very little long-term
financial risk. In fact, we view the current capital structure not to be optimal. eBay 13
would, in our opinion, benefit from taking on much more debt thereby increasing benefits
of the tax shield to yield higher returns to their owners. Another ratio is the financial
leverage. This ratio measures assets to equity. For every dollar of equity eBay has about
$1.16 in assets, meaning they borrowed $0.16.
Amazon’s capital structure is almost exactly reverse with heavy debt financing
compared to an almost non-existing stockholders equity only gone positive this year.
CurrentlyAmazon.com is financed with 93.3% debt, though this is an improvement from
last years 107%.
Asset Utilization Analysis
Ratios of turnover are closely related to profitability analysis. We will now look at
some of the key asset utilization ratios.
Asset utilization 2001 2002 2003 2004 2005 2004 2005
Sales to receivables 8.869 18.472 19.171 27.164 28.207 41.886 35.899
Sales to working capital 1.206 1.360 1.678 1.968 2.583 15.046 8.848
Sales to fixed assets 5.598 6.738 5.282 4.988 6.024 29.424 28.578
Sales to total assets 0.530 0.426 0.439 0.474 0.460 2.558 2.432
eBay Amazon.com
Sales to receivables are increasing throughout the entire period. This means that
accounts receivable has increased at a lower pace than sales. This in turn means that eBay
has tightened its receivable policies during the period as sales increased at a higher rate
than receivables. Throughout the period eBay’s sales to receivables ratio is coming at par
with Amazon.com who has seen a decline between 2004 and 2005.
Sales to fixed assets shows how successful eBay is using fixed assets in
generating sales. EBay has improved this ratio slightly this year compared to 2001. The
large drop between 2002 and 2003 was due to heavy investments in property and
equipment, especially computer equipment and software as well as land, buildings and
improvements. The increase between 2004 and 2005 was due to the pace of revenue
increases. Amazon.com’s ratio is much higher than eBay meaning that they are much
more efficient in generating revenue from their fixed assets. 14
Likewise Sales to total assets indicates how the usage of all assets drives sales.
Here, however, eBay shows a declining trend as sales growth is less than the increase in
assets.
Operating Performance
We now turn to the income statement to measure the profit margins of eBay
Operating performance 2001 2002 2003 2004 2005 2004 2005
Gross profit margin 0.820 0.824 0.808 0.812 0.820 0.231 0.240
Operating profit margin 0.188 0.292 0.291 0.324 0.317 0.064 0.051
Net profit margin 0.121 0.206 0.204 0.238 0.238 0.085 0.042
eBay Amazon.com
The gross profit margin has been very stable during the period at 82 percent of
sales. This must be considered a high margin, much higher than Yahoo’s. However,
unlike a production company most of eBay’s costs are not variable costs but rather
operating expenses. Contrary, Amazon.com’s business model has a high degree of Cost
of Sales and achieves a gross profit margin of only 24% in 2005. It is noticeable that not
only is eBay’s gross profit margin more than three times higher, but even after all eBay’s
expenses are considered their net profit margin is barely surpassed by Amazon.com’s
gross profit margin in 2005 and even higher in 2004.
The majority of costs are captured in the operating profit margin. This margin has
increased over the period as gross profit margin has grown much more than operating
expenses, only the relatively small expenses of payroll and amortization increased faster
than gross profit margin whereas heavy expenses such as marketing, general and
administrative and product development all grew by less. EBay’s operating profit margin
is also much higher than that of Amazon.com. The pattern repeats itself in the net profit
margin. Out of every $100 of revenue, Amazon.com only earns about $4.20, about six
times less than eBay.
The growth in eBay revenues was driven by strong growth rates in both the
United States and internationally. Between 2002 and 2005 total revenues in the US grew 15
from $0.718m to $1.737m or a total growth of 142% in three years. For the same period
international sales grew from $0.297m to $1.665 or 461%. These revenue gains were
achieved through continuous strong growth.
Development in accounts
(in millions) 2,001 2,002 2,003 2,004 2,005
Confirmed registered users 42 62 95 136 181
% change 45.5% 53.8% 42.8% 33.3%
Active users 18 28 41 56 72
% change 55.6% 48.7% 36.2% 28.0%
Number of non-store listings 419 630 955 1,340 1,690
% change 50.3% 51.7% 40.3% 26.1%
Number of stores listings 4 9 16 73 187
% change 115.0% 86.0% 354.4% 157.5%
Gross merchandise volume 9,319 14,868 23,779 34,168 44,299
% change 59.5% 59.9% 43.7% 29.7%
Total accounts 23 40 64 96
% change 73.0% 58.3% 50.8%
Active accounts 8 13 20 28
% change 67.1% 53.0% 39.1%
Total number of payments 39 230 340 481
% change 486.2% 47.9% 41.4%
Total payment volume 2,138 12,226 18,915 27,485
% change 472% 55% 45%
The growth rates in all categories throughout the period have been quite
impressive, though they also show a clear trend of declining growth.
Cost of net revenues is at present the same percentage of revenues as in 2001
though it has been declining since 2003. This development is primarily due to lower
eBay's traditional auction business model differs from typical e-commerce merchants. For instance, eBay provides only technology platforms and tools for e-commerce and does not have inventory like Amazon, a leading e-commerce retailer. As a result, eBay is a highly profitable company with a 16.7% operating margin in 2009,[3] in comparison to Amazon, which realized an operating margin of 4.6% that year.[4] As an e-commerce company with significant international presence, broad product category offerings, and many different technology platforms (e.g., auctions, classifieds, payments, VoIP), eBay attracts a lot of competition.
The company's growth rate has slowed since its early years as the company faces fierce competition, changes in customer behavior and expectations, and high levels of real and perceived fraud. eBay's success going forward depends on its ability to respond to growing buyer and seller dissatisfaction.
Company Overview
Business Metrics
eBay Historical Performance[5]
2006 2007 2008 2009
Total Revenue ($thousands) 5,969,741 7,672,329 8,541,261 8,727,362
Net Income ($thousands) 1,125,639 348,251 1,779,474 2,389,097
Operating expenses ($thousands) 3,289,993 5,296,177 4,237,510 5,296,177
2010 First Quarter Earnings
eBay reported its 2010 first quarter earnings on Wednesday, April 21 2010. eBay's revenue for this period was up 9% from the year-ago period to $2.21 billion. This increase was primarily due to growth in the Payments and Marketplaces business. The Payments business' revenue increased 26% to $809.3 billion. The Marketplaces business saw its revenue increase by 13% to $1.4 billion.[6]
2010 Second Quarter Earnings
In the second quarter of 2010, eBay's revenue increased 6% to $2.2 billion. This increase was primarily due to PayPal, which added 1 million new accounts each month during this quarter. Paypal's revenue increased 22% from $669 million to $817 million. However, with half of eBay's revenue coming from abroad, the weak Euro is expected to reduce this year's revenues by $250 million. [7]
2010 Third Quarter Earnings
In the 3rd quarter of 2010, eBay's revenue increased 1% to $2.25 billion. Excluding Skype, which it had sold at the end of last year, eBay's revenue increased 10%. This growth was primarily fueled by its online payments business, whose revenue increased 22% to $838 million. Total payment volume increased 26% to $22.37 billion. Marketplace revenue rose 3% to $1.41 billion. Gross merchandise volume increased 3% to $12.59 billion. The number of active eBay users also rose by 4% from 89.2 million a year-ago to 93.2 million. eBay's net income increased 23% from $350 a year ago to $432 million.[8]
2010 Fourth Quarter Earnings
Revenue increased 5% to $2.5 billion in the fourth quarter, due to a stabilization of its Marketplace business and an increase in its online payments business. Payments business revenues, which include PayPal and Bill Me Later, grew 25% to $795.6 million. PayPal finished the fourth quarter with 94.4 million active accounts, approximately growing by 1 million accounts per month. Gross merchandise volume increased 24% to $14.2 billion.[9]
Business Sectors
eBay divides its business into three main units. The business models for each are:
Marketplaces: eBay Marketplaces generates revenue by charging sellers a listing fee based on either the starting or reserve price of the auction, as well as a closing fee derived from the final sale price using a sliding scale. Additional features (such as Buy It Now, or tools to enhance the appearance of a listing) carry additional fees. In August 2008, eBay announced new pricing for listings that use the "Buy It Now" feature, which offers buyers a fixed price for the item on sale. The price reduction will charge sellers 70% less in fees. By encouraging sellers to use their Buy it Now feature, eBay is attempting to increase total listings and take some market share from competitor Amazon.com.[10] The core eBay business is the most profitable, maintaining an estimated 30-35% operating margin.
Payments: PayPal charges a $0.30 flat fee per transaction received, as well as a variable percentage (4.9%, or 1.9 to 2.9% for Premier and Business Accounts). There are also fees for cross-border transactions. PayPal runs at an estimated 20-25% margin.
Communications: Skype generates revenue through fees associated with calls from Skype to outside lines (SkypeOut), and vice versa (SkypeIn). There are additional fees for international calls, voicemail service, and other features such as ringtones. Like PayPal, Skype generates an estimated 20-25% margin.
Marketplace
The Marketplaces unit encompasses all of eBay's online storefronts and e-commerce offerings. eBay's core marketplace consists of their traditional auction format, fixed-price listings through eBay's Buy-It-Now feature and through Half.com, and eBay Stores, which allows sellers to display all their listings and describe their businesses with customized web pages.
eBay Marketplace added over 41 million new users in 2006, and had 82 million active users at the end of the year, up from 72 million at the end of 2005 (these figures imply a churn of 31 million users who became inactive during the same time period). Users accounted for $52 billion worth of goods traded overall during the year, a metric that eBay calculates as gross merchandise volume (GMV). It is important to note that Marketplaces is a trading platform and the company does not manage any inventory of goods, unlike Amazon.com, another e-commerce leader.
Marketplaces also includes:
Shopping.com, a comparison shopping website
Rent.com, which provides listing services for apartment owners and prospective renters
Various classifieds sites throughout the world, including Kijiji (various countries), LoQUo.com (Spain), Marktplaats.nl (Netherlands), mobile.de (Germany), and a minority holding in Craigslist, Inc (various).
eBay's holding in Craigslist, a widely popular personal advertisement web-based company, came into the news in the spring of 2008. Ebay sued Craigslist owners, on the grounds that the owners made plays to dilute Ebay's holding in Craigslist by issuing new shares. In response Craigslist has filed a lawsuit against Ebay with many allegations, but focused on Ebay's alleged attempts to use its position as a minority shareholder to its own advantage.[11]
eBay thus far has thrived on its ability to bring buyers and sellers together with a lower fee structure than other systems, and has proven most effective with markets involving new, scarce goods, out-of-season or end-of-cycle merchandise, and used and vintage items. The company intends to continue growth in their Marketplaces unit by continuing to improve user experience.
Marketplaces Operating Data[12]
2006 2007 2008
Gross Merchandise Volume ($M) $52,474 $59,353 $59,650
% Yearly Growth, GMV 13% .5%
The launch of eBay Express--a more traditionally structured e-commerce site with new merchandise and fixed pricing--is an attempt to reach existing users who may be dissatisfied with eBay's core auction format. eBay also plans to continue expansion into new areas and geographies, as represented by their development of alternate markets outside of the eBay format such as classifieds and Shopping.com.
Net Revenues by Segment[5] ($M)
2006 2007 2008 % Change 06-07 % Change 07-08
Marketplaces $4334 $5364 $5587 24% 4%
Payments $1441 $1,926 $2,403 34% 25%
Communications $194 $382 $551 96% 44%
Total $5,970 $7,672 $8,541 29% 11%
Payments
The Payments unit consists of PayPal, which eBay acquired after the failure of their own online payment system, Billpoint. The PayPal business model builds on the existing structure of bank accounts and credit, while allowing buyers to share only their email addresses with sellers, and providing sellers with lower transaction fees than traditional services such as credit cards.
The acquisition of PayPal has given eBay a payment service it can integrate into nearly all of its other offerings, as well as expand to reach transactions outside of eBay. This also gives them full oversight over the eBay experience from listing to purchase, and gives the company greater ability to defeat potential fraud. In 2008, PayPal processed $60 billion in total payment volume. It has over 70 million active account holders and is accepted in 190 countries and 19 currencies.
eBay plans to expand PayPal by increasing its integration with and penetration into its Marketplaces segment, as well as continue to grow its global presence and expand into off-eBay markets, as with its recent partnership with Yahoo. PayPal is also focusing on improving user experience, largely by addressing perceived issues with security.
Communications
In October 2005 eBay acquired Skype, currently the most popular carrier in the expanding Voice over Internet Protocol (VoIP) market. Skype boasts 405 million users worldwide, is available in 28 languages, and boasted revenues in 2008 of $551MM. Although initially rumored that eBay had acquired Skype to integrate the VoIP calling technology into its core marketplace business, this integration never came to fruition. As of early 2009, eBay was reportedly exploring options to spin Skype back out.
Skype's current growth strategy involves working with device partners to gradually eliminate the need for a computer to make calls, as well as finding ways to integrate the segment with its other business units. The company is also exploring ways to increase monetization and encourage its users to use premium offerings. A recent development toward that end is the introduction of Skype Prime, which allows users to charge incoming callers on a per-call or per-minute basis.
Trends and Forces
International Expansion
eBay also has a considerable international presence, with listings outside of the United States accounting for 55% of net Marketplaces revenue in 2009. Growth in Germany and the United Kingdom, eBay's largest international markets, has begun to slow recently; however, other booming markets, such as France and Korea, have continued to fuel international expansion, where growth in both revenue and number of listings internationally has consistently outpaced that of the US Marketplace. However, eBay has also seen its share of trouble overseas: it withdrew from Japan in 2002 after losing the market to Yahoo, and recently changed strategies in China, entering a partnership with TOM Online in 2006 and retaining only 49% ownership.
eBay International[13]
United States International
Net Revenue 2006 ($M) 3,109 2,860
Net Revenue 2007 ($M) 3,743 3,930
% Change 20% 37%
Net Revenue 2008 ($M) 3,969 4,572
% Change 6% 16%
Declining growth and user activity
eBay is currently experiencing a decline in the growth of its auction services, which make up the core segment of its marketplace. Average Selling Prices (ASPs) have been decreasing, and growth of Gross Merchandise Volume (GMV) in the US trails that of domestic e-commerce overall. This decline has been alleviated somewhat by accelerating growth in eBay Motors, a marketplace for cars. There has also been a slight recovery in conversion rates (the ratio of site visits to goods ordered).
Cost of doing business is becoming more expensive with a 77% increase in the cost of net revenue between FY06 and FY08. An increase of 9% was seen between the 1st quarters of FY08 and FY09. Such a high increase in cost of revenue is a concern as this makes the company less profitable, even with growing sales and as this increase has been caused by increased cost of customer service along with site operation costs, it would be extremely difficult to lower these while maintaining the same level of service.[14][15]
Decreasing buyer satisfaction
As the e-commerce field continues to develop, eBay has begun to lag behind the competition in certain key features.
Search: eBay's search engine is far less sophisticated than Google or Yahoo, using a simple unranked keyword system that allows sellers to describe their products with any number of keywords that may not even be related to the product.
Buyer Confidence: Less scrupulous sellers operate a number of scams on eBay, with some of the biggest including spamming or phishing bidders on big-ticket items, which drives away some of eBay's most valuable spenders; fake or counterfeit products, particularly in designer goods, to the point where many buyers may assume all listed items in certain categories are fake; and bait-and-switch tactics using high shipping fees to disguise the total costs for an item. Louis Vuitton and Dior Couture recently filed a suit against eBay, claiming that not enough is being done to prevent the sale of counterfeit items.
Checkout: Most e-commerce sites use a shopping cart system, where users select any number of goods they want to purchase, then check out by entering their information, with credit cards generally available for use. Amazon.com (AMZN) and Google Checkout attempt to push this even further, with their one-click models attempting to move towards enabling purchases with a minimum of user input. By contrast, eBay uses a more complicated system requiring login, and payment options can differ and be limited by the seller. PayPal alleviates the need to enter user information, but requires another separate login and, for new users, sign-up for an entirely separate service.
The launch of eBay Express (EE) is an attempt to reach its users who are dissatisfied with the core eBay model. EE uses a more standard e-commerce model, with a better search system and more standardized requirements for sellers. The company hopes it will also help them capture the new-and-in-season category of merchandise, not one of its traditional strengths. However, because EE shares the eBay branding, the company may have trouble selling it to disenfranchised users who already have a negative brand association. Further, since the company is targeting current users, it may cannibalize existing sales rather than generating new growth.
Some of eBay's other current attempts to improve the buying and selling experience and address user concerns include MyWorld, which provides seller info and a space for seller blogs, Deal Finder, a search for low-price auctions nearing close, and seller product reviews. eBay recently introduced their Feedback 2.0 system, which provides more detailed feedback information broken down over several categories, and provides buyers with anonymity to allow honest feedback without fear of negative Feedback rating retribution. The company has also begun favoring listings with lower shipping fees, though this feature has drawn criticism from sellers, who report higher conversion rates on listings with lower sale prices and higher shipping fees.
Decreasing seller satisfaction
eBay charges sellers both a flat listing fee and a closing fee based off of a sliding percentage of the final auction price. Because of the fixed cost of listing, recent drops in ASPs and conversion rates can represent, on average, a 2-3% hit to margins, with the listing fee representing a higher percentage of the closing price. Drops in ASPs will therefore affect sellers, who are generally estimated to operate with margins between 5 and 12%, much more than it affects eBay, which generates a 33% overall operating margin.
Many of eBay's largest volume sellers are establishing proprietary storefronts off of eBay, which can potentially offer them lower levels of fraud, greater customer ownership, and more repeat business. There is also increasing interest in competing solutions: Amazon Marketplace's payment system offers superior fraud protection, and Google Base, which offers listings integrated with Google, Froogle, and Google Maps searches, is gaining traction with sellers. These moves are not necessarily an attempt to move off eBay entirely, but rather to increase profitability, particularly in the face of a slowing Marketplace.
Replacing low-quality inventory
eBay has recently identified “rebalancing the Marketplace” as a priority, and its major initiatives towards that end have included the launch of eBay Express, and an increase in Stores Inventory Format pricing. However, there seems to be something of a divide between the interests of sellers and the plans of management—sellers are concerned over the declining number of buyers and lower conversion rates, which management seems to attribute to a need for rebalance, rather than reevaluation, of its auction business.
Management felt the previous low pricing for eBay Stores had sellers using eBay to list goods of almost any type or value, filling eBay with commodity goods at near-MSRP pricing, diluting the shopping experience and discouraging value-hunting eBay users. The rate increase on Stores listings, which was enacted in August 2006, was an attempt to push low-quality inventory out of the system, while driving attractive goods back to the Core marketplace. However, analysts and sellers both feel that the shift towards Stores was not due to lower pricing, but instead a result of the declining growth in the core marketplace, which rate increases will do little to stimulate.
On-site advertising: cannibalization?
eBay recently entered partnerships with both Yahoo! (YHOO) and Google (GOOG). Yahoo is now the exclusive third-party provider of all domestic graphical advertisements on eBay, provides sponsored search results, and offers a co-branded browser toolbar. Yahoo has also increased its integration between PayPal and its own services. Google has become the exclusive provider of text-based advertising on eBay's international sites. An international provider for graphic ads has not yet been determined.
Partnering with two of the Internet's largest driving forces seems to be a practical move for increasing traffic and monetization. However, these text-based ads and sponsored searches may compete with eBay's own listings, particularly as Google continues to develop Google Base, its own listings service. This competition also goes the other way, as eBay is a major purchaser of advertising keywords from Google. Yahoo recently exited the auctions market in the United States, but is still a major competitor overseas, particularly in east Asia, where it pushed eBay out of Japan in 2002. Finally, the fact that advertisements from Yahoo and Google may monetize some of eBay's pages better than eBay itself casts some aspersions on the strength of eBay's current search and listings model.
The growing rivalry between eBay and Google (GOOG) hit a new level recently, when Google planned a Google Checkout "celebration of user choice" party to directly compete with eBay's biggest promotional event of the year. In response, eBay announced it was pulling all advertisements from Google's AdWords service. In the end, Google canceled its party, and eBay resumed using AdWords, albeit with plans to explore alternatives such as Yahoo, MSN, and Ask.com.
Competition
eBay does not have major head-to-head competitors but faces fierce and growing competition in every business segment. Its Marketplace offerings directly compete with other e-commerce sites, including e-commerce giant Amazon.com (AMZN) and specialized sites such as Blue Nile (NILE), which sells diamonds, Autobytel (ABTL) and AutoNation (AN), both of which sell cars online, and Overstock.com (OSTK), a variety e-commerce retailer.
While eBay competes against a number of online retailers in its most prominent categories, many traditional retailers are also putting increasing focus into their online storefronts. eBay's core marketplace faces direct international competition from such competitors as Korea's Daum and Gmarket (which is partially owned by Yahoo).
Amazon is a large competitor that offers a wide variety of merchandise on its site, including books, DVDs, kitchenware and electronics. While the company operates a business model with a significant network of inventory warehouses (eBay has none), Amazon is expanding further into eBay's traditional territory, connecting individual buyers and sellers on its Amazon Marketplace, and offering sellers inventory management and fulfillment with Amazon Services.
PayPal is currently a dominant presence in electronic payments with no real competitors, but it faces growing pressure from Google Checkout, which has generated considerable interest due to the Google brand, integration with Google's other offerings, simplified checkout system, and ease of use with third-party software. Amazon launched its Amazon Payments platform in 2008. Microsoft is also attempting to reenter the field, having failed previously with its Passport service.
The VoIP field is expanding very quickly, and Skype competes directly with Vonage and Net2Phone, as well as traditional service providers like Comcast who are attempting to enter the market. In the corporate sector, Skype competes with Avaya and Cisco, which have an entrenched presence, as well as Microsoft, a newcomer to the market.
Finally, all three segments compete with standard forces in their respective markets, such as brick and mortar retailers, traditional credit card services, and local telephone service providers, respectively.
payment processing costs as a percentage of total payment volume in the payments
segments as compared to prior years. However, the company does foresee that cost of net
revenue will increase in 2006 both in absolute terms as well as in percentage of revenues
primarily due to the Payments and Communications businesses, each of which has a
lower gross margin than the traditional marketplace businesses.
During the period virtually all operating costs declined as a percentage of
revenues. Especially sales and marketing saw higher efficiency, but also product
development became a declining function of revenues. Again, the company does foresee
that 2006 will see increases in absolute and relative terms due to the acquisition of
Shopping.com. 16
The Altman Z-score
Z = 0.717X1 + 0.847X2 + 3.107X3 + 0.420X4 + 0.998X5 = 3.676
The purpose of the Altman Z-score is to make an assessment of the probability of
bankruptcy. A company with an Altman Z-score less than 1.20 is considered to have a
high probability of bankruptcy. Contrary a score of 2.9 or above is considered to have a
low probability of bankruptcy. Between 1.20 and 2.90 is viewed ambiguously. A total
score of 3.676 implies that eBay shows a low probability of bankruptcy. Despite
Amazon.com’s poor earnings margins they maintain a Z-score of 2.835 and is therefore
also considered relatively safe.
Return on Invested Capital
Return on investment 2001 2002 2003 2004 2005 2004 2005
Return of assets (ROA) 7.07% 8.73% 8.86% 11.27% 10.96% 24.37% 12.09%
Disaggregation of return on common equity 0.073 0.098 0.105 0.132 0.127
Adjusted profit margin 0.121 0.206 0.204 0.238 0.238
Asset turnover 0.530 0.426 0.439 0.474 0.460
Financial leverage ratio 1.137 1.121 1.170 1.175 1.161
Return on common equity (ROCE) 7.45% 10.01% 10.39% 13.27% 12.77% N/M 271.16%
Equity growth rate 7.45% 10.01% 10.39% 13.27% 12.77% N/M 271.16%
eBay Amazon.com
Return on Assets
The return on assets is an important ratio in measuring how effectively
management is running the company and their ability to generate profits from the assets.
From the above table we can see continuous growth with the exception of the last year.
The strong growth in revenues is the underlying cause of this increase. Amazon.com does 17
achieve noticeable higher returns on their assets, it should be noted that their assets base
is much lower than eBay’s.
Return on Common Equity
This ratio measures shows the return on the common stock and therefore states
the return from a shareholder perspective. Since eBay does not paid dividends ROCE will
equal the Equity Growth Rate. As the case of ROA, the ROCE also show increases in
return with the exception of the last year. Amazon.com achieves remarkable returns on
their equity again, however, it should be noted that the cause is a very small equity base,
in fact only in 2005 did Amazon.com experience a positive equity of $246 million (as
opposed to eBay’s massive $10 billion). The negative equity which was due to high
accumulated losses meant that the ROCE was not meaningful prior to 2005.
Disaggregating the ROCE we can see that the financial leverage ratio remains
constant between 2001 and 2005, while the asset turnover decreases. The main reason for
the increase in ROCE is therefore due
Comparison
Since the purchase of the eBay shares in 2003, the financial ratios of eBay has
shown a clear trend of noticeable improvements within debt-ratios, return on
assets/equity, margins and receivables. On the other side eBay has seen decline in sales to
asset and current and quick ratios, although it should be noted that the short-term
liquidity ratios were quite high in 2003.
Today eBay’s financials are stronger than when originally purchased and the
actual income numbers have even exceeded the forecasts made by the recommendation
group which justifies the higher current stock price compared to their calculations.
eBay's (NASDAQ: EBAY) most prominent business is ebay.com, an internet auction site that connects individual buyers and sellers worldwide. Its massive popularity places it as one of the Internet's leading e-commerce sites, and millions of items are sold each day on eBay.com. eBay generated overall revenues around $8.73 billion for FY09, an increase of 2% from $ 8.54 billion reported for FY08. from its three primary businesses: auctions, payments (PayPal) and communications (Skype).[1]
In addition to PayPal and Skype - two businesses that eBay acquired through mergers - eBay has grown beyond its three core businesses by purchasing various companies. These acquisitions have served to expand eBay's business into different regions of the world as well as extend its online auction-based business model. As a result, eBay faces the challenge of integrating these properties with its existing businesses, many of which compete with one another. The company's key acquisitions include, by year:
2005: Skype (VoIP), Rent.com (real estate), Shopping.com (electronics and other merchandise), Verisign's payment gateway, and several classifieds sites[2]
2006: Swedish auction marketplace Tradera.com [2]
2007: Stubhub (event tickets marketplace) and Stumbleupon (search engine)[2]
2008: Bill Me Later (alternative online payment method)[2]
Latest Full Context Quarter Ending Date
2010/12
Gross Profit Margin
78.2%
EBIT Margin
22.9%
EBITDA Margin
31.0%
Pre-Tax Profit Margin
22.9%
Current Ratio
2.4
Quick Ratio
2.3
Leverage Ratio
1.4
Receivables Turnover
2.6
Asset Turnover
0.5
Revenue to Assets
0.4
ROE from Total Operations
11.8%
Return on Invested Capital
10.7%
Return on Assets
8.2%
Debt/Common Equity Ratio
0.10
Price/Book Ratio (Price/Equity)
2.74
Book Value per Share
$11.79
Total Debt/ Equity
0.12
Long-Term Debt to Total Capital
0.09
SG&A as % of Revenue
37.3%
R&D as % of Revenue
9.9%
Receivables per Day Sales
$155.75
Days CGS in Inventory
0
Working Capital per Share
$5.04
Cash per Share
$4.30
Cash Flow per Share
$1.97
Free Cash Flow per Share
$1.49
Tangible Book Value per Share
$6.60
Price/Cash Flow Ratio
16.3
Price/Free Cash Flow Ratio
21.7
Price/Tangible Book Ratio
4.88
Most recent data
5-Year Averages
Return on Equity
11.9%
Return on Assets
8.8%
Return on Invested Capital
11.6%
Gross Profit Margin
80.2%
Pre-Tax Profit Margin
23.6%
Post-Tax Profit Margin
18.6%
Net Profit Margin (Total Operations)
18.6%
R&D as a % of Sales
8.9%
SG&A as a % of Sales
40.0%
Debt/Equity Ratio
0.02
Total Debt/Equity Ratio
0.04
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