Question
3/28 Comments from Derek Brown of Pacific Growth Equities
INVESTMENT SUMMARY
* We recently participated in the PeSA Spring Summit 2005, joining more than
200 representatives from some of the larger merchants selling on eBay
* Our key takeaway: larger merchants still find eBay profitable, but their
focus/growth strategies increasingly center around proprietary Web sites
and/or other marketplaces
* We reiterate our Under Weight rating on eBay's shares, particularly as we
head into the seasonally slower months of summer
VALUATION AND RECOMMENDATION
eBay currently trades at a 2005 P/E ratio of 48x our estimate of $0.76 and an
EV/Sales ratio of 11x our estimate of $4.34B. In our opinion, these are rich
multiples, given the Company's projected 3-year growth rate of approximately
20-30%, persistent signs of platform "fatigue" we are seeing in eBay's core
business, feedback we have received from the channel, and changes we are seeing
in the competitive landscape. Accordingly, we continue to recommend a more
cautious approach to eBay's stock and maintain an Under Weight rating on its
shares.
INVESTMENT HIGHLIGHTS
On March 18-20, we participated in the Professional eBay Sellers Alliance (PeSA)
Spring Summit 2005 in Atlanta, Georgia. We felt attendance was extraordinary
at more than 200, including representatives from a number of the larger
merchants selling on eBay, as well as employees of eBay, Overstock.com
(OSTK:NASDAQ, Equal Weight), Amazon.com (AMZN:NASDAQ, Not Rated), ChannelAdvisor
(private), Marketworks (private), buySAFE (private), and Vendio (private), among
other companies.
Founded in 2003, the Professional eBay Sellers Alliance (PeSA) is a non-profit
trade association comprised of roughly 700 high-volume eBay sellers. Originally
created as a forum for the exchange of ideas specific to the issues faced by
large merchants on eBay, PeSA's mission is now to "provide a forum for members
to exchange innovative and creative ideas and business solutions for the
purposes of leveraging strategic or technological influence with online selling
platforms; perpetuating the professional education of members; developing
benefits for members through pooled purchasing influence; increasing the
exposure, trading volume, and profitability of members; and representing a
collective voice to the market, the industry, media, and policymakers."
Our observations and dialogues from the Spring Summit suggest that while larger
merchants still maintain a presence on eBay because it remains a profitable
channel for them, their focus and strategies for growth seem to be increasingly
centered on business on their own Web sites and/or other marketplaces. To this
end, we heard surprisingly similar stories/anecdotes from a number of attendees
across a range of categories that pointed to less fraud off-eBay than on-eBay;
higher average selling prices (ASPs) off-eBay than on-eBay; less
hassle/frustration off-eBay than on-eBay; and, most importantly, greater profit
potential off-eBay than on-eBay. At the same time, every seller with whom we
spoke indicated that eBay is still a profitable channel for them and that they
were, therefore, still planning to maintain a presence on it; however, the
manner in which many of them use eBay seems to be evolving into something of an
incremental customer-acquisition vehicle and/or a venue-of-second-resort, rather
than the exclusive sales channel it had been in years past. Consistent with
these dynamics, a number of the sellers with whom we chatted indicated that eBay
would represent a smaller portion (we heard a broad range of 10-90%) of their
business this year than the nearly 100% it represented in 2003. These findings
are very consistent with conversations we have had with larger merchants in the
past and may help explain some of the "business fatigue" we have been noting in
eBay's business over the past 5-7 quarters.
Hosted storefronts (using Paid Search, Shopping Search, and Affiliate
Marketing), Amazon.com's Marketplace, and, to a lesser degree, Overstock.com,
were the online "alternatives" to eBay mentioned most frequently. Interest in
independent Web storefronts seemed particularly high, in our view. Not only
were 3 of the first 4 presentations of the Summit focused on building/promoting
off-eBay commerce-enabled Web sites (presentation subjects included "Developing
Your Own Web Site" and "Promoting Your Web Site"), but our "in-the-halls"
discussions with sellers suggested that quite a few were already operating their
own Web-based storefronts with great success. While it was clear that
storefront efforts were costly and challenging and may not be for everyone
(especially those with products ideally suited to an auction environment), the
experienced sellers with whom we interacted stated rather uniformly that the
revenue, profit, control, and flexibility generated by their off-eBay
storefronts far surpassed any potential downside/risk they saw associated with
platform diversification efforts. Further, most eBay sellers we asked that also
operated a storefront indicated that ASPs off-eBay were consistently (and
considerably) higher than those they captured on-eBay - a phenomenon that eBay,
itself, highlighted at its Analyst Day 2005, when discussing a key value
proposition it delivers to buyers in the form of "best prices" (in fact, eBay
data showed that it offers buyers discounts of up to 63% on branded merchandise
and across broad categories of goods, when compared against a variety of
alternative venues.)
Amazon.com's Marketplace seemed to be viewed/presented as a valuable channel...
for some. Amazon.com's Marketplace presents sellers with an incredibly rich
fixed-price eCommerce environment, highlighted by millions of active customers,
a proven technology/payments infrastructure, and an extremely robust
merchandising engine. At the same time, back-end integration seems to be
extremely challenging for everyone that has tried (our sense is that Amazon.com
would rather have it done right at almost any cost, or not at all) and volumes
generated through the platform seem to vary quite a bit from seller-to-seller.
We heard routinely, however, that ASPs on Marketplace were greater than those
achieved on eBay and that selling through Marketplace was much closer to running
on "auto pilot" than any seller had achieved on eBay. Interestingly, Amazon.com
does not appear to us to be interested in opening its doors to any and all eBay
sellers, regardless of size; rather the company seems far more focused on
building deep relationships with a smaller number of merchants that consistently
bring high-quality experience and depth-of-SKU.
Overstock.com also garnered a surprising amount of attention from the sellers in
attendance. Though Overstock Auctions is nascent, tiny, and suffers from low
conversion rates, PeSA members listened intently (and in rather large numbers)
to the company's Auctions "pitch," which included lower fees, volume discounts,
free "Club 'O' Gold" membership, custom marketing plans, and customized account
management, among other value-added-services. Said differently, Overstock.com
made it quite clear that it operated on a distinctly "unlevel playing field" and
that it was willing and happy to make concessions to attract and retain
category-leading sellers. Many merchants with whom we spoke were not yet
selling on Overstock Auctions, but were intrigued enough with what they heard
and saw to continue the dialogue and, perhaps, get the wheels in motion to
integrate with Overstock's emerging platform. We would expect to hear more from
Overstock Auctions during 2005.
In summary, the recent PeSA Summit seemed to focus one fundamental question:
sell on-eBay or off-eBay? As mentioned previously, our observations and
dialogues with sellers at the PeSA Summit (and elsewhere) suggest that the
answer is increasingly "both" - on- AND off-eBay. Larger merchants still
appear to us to be interested in maintaining a presence on eBay because it
remains a profitable channel for them. However, their focus and strategies for
growth seem to be increasingly centered on doing business on their own Web sites
and/or other marketplaces.
Exhibit 1 offers one way to analyze the "on-eBay vs. off-eBay" question that
provides insight into the decision faced by sellers. In our analysis, we
compare the profit generated through the sale of 1,000 items per month on eBay
with the profit generated by doing so on a hosted storefront using Paid Search.
eBay's management offered a something of a similar analysis at its Analyst Day
2005, by comparing the cost of selling 100 books per month on- and off-eBay. We
have made a number of key estimates/assumptions in our "model" that differ from
those used by eBay's management in its Analyst Day cost comparison analysis:
* Average selling price (ASP)
* We assume an on-eBay ASP of $40, which is close to what we believe
the actual Non-Motors average on eBay was in 2004;
* eBay's management assumed on-eBay ASP of $10;
* We assume that ASPs garnered off-eBay are at least as high as
those achieved on-eBay, if not at a substantive premium (5-50%) to
those achieved on-eBay, consistent with sellers' feedback and data
provided by eBay, itself, at Analyst Day 2005;
* eBay's management assumed an off-eBay ASP of $10 (i.e., no
premium);
* Cost to list/sell ("take" rate) on eBay
* We estimate a cost to list/sell (otherwise known as eBay's "take"
rate) of nearly $3.60 per item (or 8.9%), which is close to what
we believe the actual Non-Motors average on eBay was in 2004;
* eBay's management assumed a cost to list/sell of roughly $1.33
per item (or 8.8%)
* Cost to host/market a storefront
* We applied the actual cost to operate an Enhanced Yahoo!
(YHOO:NASDAQ, Over Weight) storefront of $100 per month plus a 1%
transaction fee;
* eBay's management assumed a flat storefront hosting cost of
$39.95 per month;
* We estimate Paid Search pricing of $0.30 per-click, on average;
* eBay's management assumed a $0.20 price-per-click;
* We estimate a click-to-purchase conversion rate of 2.5%, in line
with eBay management's assumption
* We estimate 100% customer-acquisition from Paid Search (i.e., no
repeat customers), consistent with eBay management's estimates
* Cost of payments
* We applied the actual PayPal fee structure at this level of
transaction volume of $0.30 per item plus 2.20% of transaction
volume.
Based on our analysis, selling off-eBay may be far more lucrative for certain
merchants (over the short- and long-term) than selling on-eBay, under the right
conditions. More specifically, our analysis shows that sellers' profits can be
higher off-eBay if/when sellers achieve an off-eBay ASP premium of 25% or more.
Of perhaps more significance, in our view, is the fact that this is true on a
customer's first transaction with a seller and completely ignores the potential
lifetime value of that customer to the seller and/or the fact that future
on-eBay sales to the same customer would require payment of all relevant eBay
listing/selling fees. Looked at from this "lifetime" perspective, it may
therefore still make economic sense for a seller to aggressively pursue off-eBay
sales even if off-eBay ASP premiums are less than 25% and/or they are not
maximizing their near-term profit potential. Perhaps this type of analysis
explains why many experienced sellers with whom we have spoken are finding ample
justification (financial and otherwise) to continue pushing business off-eBay in
greater volume/quantity than they have in the past.
INVESTMENT RISKS
Despite its success to date and our confidence in its management, eBay remains a
relatively young company in an emerging industry. As a result, investors should
be aware of certain risks that could adversely affect the Company's business,
including the fact that competition in the retail/eCommerce sector is fierce,
and there are no assurances that eBay will be able to grow as aggressively as
anticipated. Consumer demand around the globe for products/services available
in eBay's marketplace may also differ materially from our expectations. There
are also uncertainties as to the effectiveness and viability of the Internet as
a commerce medium. In addition, the Company may have difficulty managing its
business and its technology, integrating recent acquisitions, and in executing
its business plan. Furthermore, there are no assurances that eBay will be
successful in its plans for category, market, or platform expansion. At the
same time, negative publicity generated as a result of fraudulent, deceptive, or
illegal conduct by users of eBay could damage the Company's reputation and
diminish the value of its brand name which could, in turn, have a materially
adverse effect on the Company's business, results of operations, and financial
condition. Spending slowdowns/reductions by consumers and businesses due to
geopolitical and macroeconomic uncertainties may also negatively impact eBay's
business. eBay, as well as PayPal, are also in patent and other litigation that
could materially harm its business. Moreover, changes in the domestic and/or
international regulatory and/or tax environments could materially effect the
Company's operations. Lastly, eBay's future success is substantially dependent
on the performance of its executive and senior management and key technical
personnel, and its continuing ability to find and retain highly qualified
technical and managerial personnel.
COMPANY DESCRIPTION
eBay is the world's largest online trading community. Founded in September
1995, the Company enables individuals and businesses to efficiently trade a
seemingly endless variety of items - from automobiles, real estate, and sporting
goods, to collectibles, computers, and apparel - in auction and fixed-price
formats. Participating in nearly 40 countries around the globe, eBay now boasts
more than 125 million registered users and has witnessed more than $81 billion
worth of merchandise bought/sold through its platform. eBay's initial public
offering commenced in September 1998 at a split-adjusted price of $3.00 per
share.
Answer
..... and in a nutshell?
Answer
http://story.news.yahoo.com/news?tmp...ns_summary_box
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That clarifies Pesa for me. I now understand that they are an organization that is focused on increasing profits for the members.
Not necessarily on ebay, and in no way are they concerned with making a
positive impact at ebay for all sellers.
IMHO,of course
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If you are right, that does not make it a bad association, but it does mean the name of the association may be incorrect now.
Of course, they are just realists, and ebay needs to watch their behaviour, because if almost 30% of the membership of an organization cares enough to show up at a seminar/summit, that in itself is serious.
what they are saying is what is happening, and ebay needs to figure out what to do to keep SELLERS happy, because buying is FREE on ebay, sellers make the bottom line happen, and as soon as EBAY figures that out, we might get some where.
thanx for posting this RR
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Originally Posted by starr25
..... and in a nutshell?
No one knows anything.