In a lovely piece of understatement, Goldman Sachs today raised its price target on shares of Internet auctioneer eBay from $90 a share to $150 a share, saying that the company had reached the previous target “earlier than expected.” “Earlier” in the sense that eBay blew past Goldman’s price target just about a month after it was set, and didn’t even pause before exploding another 27 percent today to an all-time high of $130 a share. (The stock actually reached $140 at one point during the day.)
Internet frenzy is back and better than ever, with just about every Net company rising sharply in the last month and positively vertiginously in the last few days. Yahoo!, for instance, is up 60 points in the last month, while AOL and Amazon.com have both hit new 52-week highs. Even the lesser players in the industry–Excite, Infoseek, Egghead, N2K (the list goes on and on)–have risen 30 percent to 40 percent in just the past week. But eBay’s ascent has been particularly breathtaking, since the company went public–to mild mockery in this space, I should add–in September, less than two months ago, at $18 a share.
In other words, if you’d bought 1,000 shares of eBay at the IPO price–an impossible thing to do for anyone but Wall Street insiders, but indulge in the dream–you’d now have made $112,000 in about 60 days. Not bad work if you can get it.
eBay now has a market capitalization of $6.5 billion, which is, of course, much bigger than that of any number of hefty-sized companies which make real things. And since in its last quarter eBay announced revenues of $12.9 million, that means it’s trading at a hefty price-to-sales ratio of 500-to-1. (Microsoft, by contrast, trades at a price-to-sales ratio of around 20-to-1.) Speculative froth, anyone?
Still, though eBay’s shares have obviously risen as a result of a mix of short-covering (shortsellers buying shares back and therefore driving the price higher), momentum plays, and good old-fashioned speculation, and although the company’s valuation can’t be justified by any conventional–or unconventional–analysis of future earnings potential, eBay does have a few important things going for it.
The company–which conducts online auctions for items ranging from books to antiques to computers–has 1.2 million users, and it grew revenues in the last quarter at an annualized pace of 787 percent (which is a lot faster than Microsoft or any bricks-and-mortar company). More importantly, the company carries zero inventory and generates income both from listing fees and from the royalties it takes on every sale. Not surprisingly, then, eBay is actually one of the few Internet companies that’s already turning a profit. The company is in the midst of a marketing agreement with AOL that is costing it millions, but that’s an agreement that appears to be paying off in generating customer traffic. And with a registered base of users of more than a million, eBay must be imagining possibilities wider than just Beanie Babies auctions.
The real questions for investors, then, have nothing to do with today’s price-to-sales ratio. Rather, the key questions are instead: “What is the future value of a new customer to eBay (how much revenue will each customer generate over his or her lifetime association with the company)?” and “How high are the barriers to entry in the online auction business?”
From the outside, an online auction doesn’t appear to be that difficult to conduct, and in fact you can find them at a number of other Web sites. Like Amazon.com, eBay is confident that as the real first mover in the industry, it can build a strong enough brand name and powerful enough personalization services to keep its current users while adding millions more. I’m skeptical that branding is enough to keep a company’s profit margins inflated and its return on capital high. But unlike many other Internet companies, eBay’s business model is sound. And while that doesn’t mean that its stock is not madly overpriced, it does mean that 10 years from now (contrary to what I once suggested) eBay may still be a force on the Net.