In keeping with our discussion of eBay as the Godzilla of B2B that is becoming a household word, I wanted to provide a link to an excellent article:
fool.com
Although I came to look at eBay later than many, I'm finding all kinds of confirmation now that others are looking in the same mannner. Where have I been so long on this Internet business model? Nevertheless, using the option effect of what eBay could venture into within the B2B space is another bullish reason to support the high valuation. Keep in mind, as I have been learning in the last day or two over at the Rule Breaker board, that one of the rules is not to focus on the valuation, but to focus on the business model and its prospects in terms of priority. I think, if I remember, that I had come to a similar conclusion when I first started to grasp a handle on the Icarus Scoring and Foolish Five criteria. I believe I said that I was not going to comment on valuation because I didn't know how to touch that one.
BB
In case one is not registered at the Fool, here is the article:
Rule Breaker Portfolio
Your Favorite Rule Breaker?
Name it, Fool
By Jeff Fischer (TMF Jeff)
JUPITER, FL (Nov. 1, 1999) -- The most substantial returns
on a successful investment arrive, and continue to arrive, after
the investment has aged many years and as it continues to
age. In other words, most of the return on your investment
dollar is generated at the tail-end of a long-term investment's
life.
A little numerical example never hurts. Put the nearest pencil
behind your ear and then continue!
If you invest $10,000 and it grows to become $100,000 in 20
years (10 times your money in 20 years, great job!), any 10%
gain from that point onward will earn you at least $10,000 on
paper. That is, of course, your entire original investment. When
you started, a 10% gain was worth only $1,000 to you.
Assuming that your portfolio eventually grew to $500,000 in
value, a 10% gain (which is less than the S&P 500's average
annual return since 1926) would equate to $50,000 in added
paper value -- five times what you started with. Meanwhile, a
mere 1% uptick would add $5,000 to your account's value.
The longer that you can hold winning investments, the more
that you can eventually earn on them. The Rule Breaker Portfolio
has prospered on this principle at what I call Hypersonic Warp
3000 (2000 is passe already) Super Galactic Speed (patent
pending).
The BreakerPort's $2,000 that it invested in America Online
(NYSE: AOL) in August of 1994 has already grown to over
$293,000, representing a total return of over 14,000%. Now
almost any move in the stock's price can result in a daily gain or
loss that is often much larger than the portfolio's $2,000 initial
stake. Today is a case in point: $11,000 in new value was
created on the portfolio's $2,000 investment base -- that's
amazing after only five years. After a few decades, however,
something like this is merely the reasonably hoped-for outcome.
An investment's value will ideally dwarf your initial investment
in it. This is compounding at work. Most people don't understand
it.
A Washington survey released last week found that 25% of
Americans believe that the government-run lottery is their best chance for achieving
wealth. In other words, a quarter of people in our country believe that they have a better
chance of getting struck by lightning than they do of living with significant monetary
comfort. This is unfortunate to say the least. But this fact also represents a great
opportunity. It represents an opportunity for Fools everywhere to help others learn about
saving and the "surprise" of compounding.
Compounding is so subtle it's deceptive. Compounding means that if you invest just $50 a
week for 40 years, and you earn 9% on the money annually, you'll end with over
$1,026,850. Plus, that 9% return is below that S&P 500's average 11% annual return, a
return which history says you could earn by investing in a simple index fund. At 11%, you'd
have close to $2 million after 40 years in the scenario above. To calculate the potential
value of your own situation over 10 years, 20 years, or however long, use the Fool's handy
compoundulator.
The higher your average annual return, obviously, the greater amount that your money will
compound. America Online and Amazon.com (Nasdaq: AMZN) have compounded at
typically unheard of rates, but happily this type of success always swims -- along with a
school of sharks -- in a Rule Breaker's sea of possibilities. Finding exceptional Rule Breakers
while not getting bitten isn't easy. David Gardner presented six Rule Breaker criteria to help
light an otherwise dark and vast water. It is upon Fools such as you and me (and David) to
dive down and seek the best that the market has to offer.
My favorite Rule Breaker from an ocean of possible choices: eBay (Nasdaq: EBAY).
Why?
In a nutshell, eBay has an unlimited market potential. By not carrying specific inventory (not
to mention not carrying any inventory at all), unlike most companies, eBay allows its
business to in effect sell anything -- anything, that is, that the public wishes to sell.
Therefore, the size of the world market for its business is difficult to fathom. Just as
importantly, as eBay's market size reaches ever-long toward infinity (as the world arrives
online and as our population grows), eBay's costs to run its business will (eventually) always
shrink ever closer to zero as a percentage of sales.
This paradigm -- that of the business's potential size moving to infinity while its costs shrink
toward zero, relatively -- makes the company the most attractive long-term Rule Breaker
that I know. Now add eBay's dominance. Yahoo! (Nasdaq: YHOO) and Amazon follow eBay
as numbers 2 and 3 in the person-to-person online auction industry. However, recent
auction completion rates at the two largest competitors are estimated to be only 11% and
14%, respectively, which compares to 65% at eBay. Plus, eBay has three times the items
for auction as Yahoo and at least six times as many as Amazon.
eBay is my favorite Rule Breaker. It presents high risk, but I believe that it has the potential
to compound at a rate well above the S&P 500's average return over the next 10 to 15
years.
What is your favorite Rule Breaker? If you have a favorite and at least five minutes to
spare, please post your favorite Rule Breaker company and its ticker symbol on the Rule
Breaker message board. Also, please post an explanation as to why it's your favorite Rule
Breaker. Your thoughts can be as brief as the explanation above (we all must do our own
homework, after all), or as long as War and Peace. For additional Foolishness, please share
your favorite vacation spot and why.
So, on the Rule Breaker Companies board, please post:
1.Your favorite Rule Breaker company and its ticker symbol
2.Why it is your favorite Rule Breaker
3.Your favorite vacation spot and why
Please note: You may not be sure your favorite company is a Rule Breaker yet. That's still
Foolish! Post it as a potential Rule Breaker and state why you believe in its potential. In the
next Rule Breaker column that I write, we'll run down the complete list of companies that
you post and see what we have.
Fool on! |
