The March 22, 2001, headline on the satirical Web news source, The Onion, took a jab at how ''Everything In Entire World Now Collectible.''
The article cited examples on eBay where items like milk cartons, latex paint, sponges, lint, twist-ties, factory run-off, and postcards from music groups that were less than one-hit wonders were netting big money. On-line auctioneer eBay Inc. parlayed this phenomenon into success for shareholders, making it one of the select few companies able to shrug off the collapse of Internet stocks.
But in January, eBay's taxonomy as a member of "growth infinitis" suddenly became suspect. The latest quarter reported the customary juicy profit and revenue gains of around 44 per cent for both -- but they were a tad below dreamy-eyed analysts' expectations. Worse, the company revised its growth expectations downward for 2005 to a "measly" 16 per cent, far below what was hoped. Shares closed down 19 per cent that day and nearly $13-billion (U.S.) was sheared off the market cap. This was a case of being priced for perfection -- as if flawlessness ever endures.
Fortunately for eBay, it has enjoyed near monopoly status -- with second-tier players like Amazon.com, Yahoo, and upstart Overstock not providing much of a challenge. The era of pretenders like Canadian upstart Bid.com are long gone. However, that does not mean that eBay's turf is impenetrable and rivals will not steal some of its market share.
What seems clear is that eBay is evolving into a buyer's market; where because of the rapid proliferation of auctions on the site, average prices are dropping. Unfortunately, costs for sellers are rising. This naturally squeezes margins.
If a certain item happens to inculcate strong price action, the ruthless efficiency of Internet technology means information can be rapidly gleaned and new buyers can arrive in virtual nanoseconds. The company in some respects is a mirror image of our typical Contra buys.
Some like to classify our purchases as risky because they trade at low prices with the enterprises in turnaround mode. Many people rest with the impression that investments in large corporations, with a terrific history of steady growth, are not possibly treacherous. This is a fallacy.
History is littered with the carcasses of blue chips and phenomenal growth plays that have fallen to penny status and disappeared. While eBay's fate should be better than this, the recent price drop does not present a bidder's paradise.
Benj Gallander and Ben Stadelmann are co-editors of Contra the Heard Investment Letter. This column first appeared on GlobeinvestorGOLD.com.