Teflon,
I promised over on the mother ship thread that I would present a case for eBay as a Gorilla-King (Godzilla that is) eWorld investment. I only want to get the ball rolling and present some numbers at first to open it up for discussion. We know that eBay is in the new chapter of the revised edition of The Gorilla Game . However, I want to run some numbers on eBay - not using the Icarus scoring system that Moore/Kippolo/Johnson have used, but on tight criteria for choosing a good quality growth stock using five basic fundamentals. This comes from The Fool's preaching method at The Motley Fool. Brothers Gardner to be exact. I don't take any credit for the 5 fundamentals. They can and should be used to apply to any growth stock for first viewing pleasure.
So here goes. Here are the five criteria we should look for in a growth stock:
1. Sales growth in excess of 15% over the previous year.
2. Gross margins holding steady or rising and above 50%.
3. Cash savings that amount to 5 times more than long-term debt.
4. Inventory that is growing no faster than sales over the past year.
5. Receivables that are not growing faster than sales over the past year.
I initially discredited the idea of eBay until I returned home for a visit to the states this past summer (after being away for 4 years) and was reminded of something. Americans love junk. They love to hit the rummage sales, flea markets, garage sales, ski swaps, baseball card trading posts, you name it - one person's junk is another's treasure. Dang! How could I have forgotten that love of junk. The neighbors across the street from my parents had their bi-annual God awful JUNK sale while I was there. I watched them prepare the event. They even bought 50 pairs of buffalo hooves from a local meat packing plant. They glued eyes on the hooves and painted a face on them. Stinky, smelly dead buffalo hooves with flies swarming all around them. Guess what? Every pair sold!!!! Then I helped my sister clear out a bunch of junk from her house to haul to the dump. The neighbor saw me loading up a trailer and asked what I was going to do with it. I said it was headed for the dump. He said he was going to call a few people to come take a look at the junk. I said fine. The people came over and took about 60 percent of the junk off of my hands. Fine with me. It was less to pay the dump in fees.
Then I hearkened back to flea markets in NYC, ski swaps as a kid, organized rummage sales and the like. What's all this got to do with eBay? A lot. It's a clearing house for customer to customer or one to one business transactions. Not just with junk, but with many specialty items and groups similar to arts and craft fairs, swaps, trading meets, etc... . Okay, with that in mind I started to think about eBay and how the business works. I went to the site and was amazed at what is available and how easy it is to transact business - both as a buyer and as a seller. Pretty neat I thought. Nevertheless, the entry into this format by Amazon and others got me to thinking. No way eBay can survive.
Now, let's apply those standard tough, Foolish criteria to eBay and see what the Fools say about eBay.
eBay (10-Q, 8/9/99)
Sales growth: 155.0%
Gross margins: 77.8%
Cash-to-debt: 5.86x
Inventory growth: n/a
Receivables growth: 92.7%
Here's a company that meets all of our criteria on the list. Sales have been extremely strong; gross margins are in the stratosphere. The auctioneer carries no inventory (ahh, the Internet). Receivables growth has not outpaced sales growth. And eBay has nearly six times more cash than debt. No wonder the business has grown 10 times in value over just the past year, to $19 billion. While that strong stock performance would scare off many investors -- the strong business performance is what attracts us.
OOOOooooo. That's good. Not enough? Need a little more convincing that we can measure this business model? What do our manual authors say about eBay?
*The auction model: eBay showed the way, and now sites like Amazon are following the path. As we have already noted, the Internet's transaction exchange technologies make it a remarkably apt medium for auctioning. Moreover, auctioneers can charge a premium for superior reach, either in terms of the volume or the value of the items and customers they are able to bring together. As a result, this model looks very promising indeed. (page 326 - revised manual)
Running the Icarus Scorecard on AOL, Yahoo!, Amazon.com and eBay ranked AOL first, eBay second, Amazon third followed by Yahoo!. The criteria used in the Icarus scoring for the Godzilla includes these items:
Switchboard/exchange
Brand
Value chain position
Specialization
Stickiness
Low-cost business design
Experience curve
Each are weighted with High Medium and Low (5,3,1) as it pertains to GAP and CAP for a total weighting score for each item. Then the total weighting is added together for the total score based on the Icarus scoring method. It's not a fool proof method, but in conjunction with the Fool method above of matching the five tight criteria (which many companies fail - believe me), I think we have a good working basis to at least attempt to make sense of this crazy eWorld Godzilla game.
A few more rules from our authors:
It's not a gorilla game. Don't confuse the two.
Take a buy-and-hold approach.
Pick individual stocks based on Icarus scores.
Don't buy baskets of stocks.
In the case of eBay, we could buy a basket of the auction site stocks (eBid, Amazon - for the auction portion of AMZN - and the others). However, using the rule of not buying baskets - we would have to go with the leader based on the Icarus score of eBay. I'm glad my summer visit to the states reminded me of a few things about why eBay is so successful. I'm even more glad that the revised edition of the manual points me in the right direction of trying to make sense of it. I'm also glad, that using basic business fundamentals to find great growth stocks which I learned Foolishly help point out to me the value of eBay's business model and business.
I would welcome discussion and thought on this Godzilla as possible inclusion in the diamonds in the rough portfolio.
BB |
