Under the Spotlight Wall St: eBay (EBAY)
eBay is one of the undisputed pillars of the internet age, but its rise was not always certain. In today’s Under the Spotlight, we shine a light onto eBay, an e-commerce titan.
When it comes to e-commerce, Amazon ($AMZN) dominates the U.S. market, but for Australians the go-to is often eBay. The company had first mover’s advantage down under, launching here in 1999, just four years after it was founded. While eBay is now worth US$24b, at the start of the internet age its future was far from certain. In today’s edition of Under the Spotlight, we dive into what makes eBay one of the giants of the internet.
eBay started life as AuctionWeb in September 1995, and its mission was laid bare in its founding statement: ‘dedicated to bringing together buyers and sellers in an honest and open marketplace’. Like many pre-Dot-Com Bubble internet companies, AuctionWeb was developed over a single Labour Day weekend by its founder, Pierre Omidyar, on his personal computer. But code doesn’t make a business, and Pierre turned to Jeffrey Skoll for help writing the company’s inaugural business plan. It paid off, and by the end of the year the company had sold its first listed product: a broken laser pointer.
In 1996, AuctionWeb snowballed and reached several firsts. In June, the company hired its first employee, Chris Agarpao, who still works for eBay. The same month, AuctionWeb reached US$7.2m worth of goods sold on its platform. It was safe to say AuctionWeb had potential. In July, Pierre began working on it full time, while Skoll became president of the company.
At that time there was a plethora of Dot-Com Bubble startups and, as we know, many of them went bust. What did they have in common? A lack of growth to match their high valuations. This wasn’t a problem for AuctionWeb, as was evident when the Beanie Babies craze began, making 1997 the company’s breakaway year.
Beanie Babies were collectable stuffed animals with names, and people invested significant amounts of money into them, believing their value would eventually appreciate. Indeed a few rarer ones sold for over US$13,000 online after costing only US$5.
How does this relate to AuctionWeb? The company was known mainly for selling collectables, and it soon became one of the main sources for the Beanie Babies’ secondary market, selling over US$500m worth of the stuffed animals. In the second quarter of 1997, the company sold its one millionth item, a Big Bird jack-in-the-box. By September 1997, on solid footing, the company renamed itself eBay and ended the year earning US$5.7m in revenue – US$2.6m in Q4 alone.
In the early years, eBay remained a niche marketplace for collectables, but if it wanted to continue its rapid sales growth, it needed to expand. Enter Meg Whitman. In 1998, eBay replaced Jeff as President with Meg, a Harvard Business School alumnus who had worked at major companies like Hasbro ($HAS). She quickly took to poaching several experienced senior staff and went to work expanding the company’s focus outside of collectables. As part of this plan, eBay made its first two acquisitions in July 1998, before listing on the NASDAQ in September.
Meg Whitman’s impact on eBay’s early years can’t be overstated. Under her leadership, the company expanded to Germany, Australia and the UK in July 1999. It continued to shift its focus from selling items to connecting people. Two major developments towards this goal were the introduction of eBay Motors, which would sell two million vehicles by 2006, and eBay University.
eBay University was a stroke of genius, as it taught people how to sell on the site and played a large part in making eBay an acceptable career for many. But don’t think the company abandoned the collectables market; it retained its prominence and in 2001 sold the oldest known pair of Levi’s jeans for US$46,000, a record at the time.
Still in 2001, eBay launched eBay Stores. People could build a business directly on the platform for just a few dollars a month, solidifying the work eBay University began. Another breakthrough came in the form of an acquisition that was arguably one of the smartest moves the company has ever made. No, we’re not talking about the 2005 acquisition of Gumtree. In 2002, eBay purchased PayPal ($PYPL) for US$1.5b.
Buying Out The Mafia
PayPal had gone public on the U.S. markets earlier that year, and it was much better run than Billpoint, the payment service that eBay had bought in 1999. As a Merrill Lynch analyst put it, ‘PayPal is the “gorilla” in the online payment market, as eBay is the “gorilla” in the online auction market’. If you can’t beat them, join them – or in Meg’s case, have them join you. PayPal’s founding members and employees who sold to eBay are known as the PayPal Mafia, and include Elon Musk, Peter Thiel, Ken Howery, Luke Nosek, Reid Hoffman, Jawed Karim and Max Levchin. Meg realised that electronic payments were the future, and boy was she right.
But PayPal’s tenure as an eBay-controlled company wouldn’t last forever. In 2015, long after Meg resigned from executive management at eBay in 2007, the company spun off PayPal at a valuation of US$47b. In other words, PayPal returned a 3033% capital gain, excluding the billions in profits it generated between 2002 and 2015.
Collecting The Past
For a company generating US$5.7m in revenue in 1997, eBay has seen mind-boggling growth over the last 24 years. In 2021, eBay generated US$10.3b in revenue, an increase of 17% year-on-year and 40% from 2019’s pre-COVID-19 results. Not one to rest on its laurels, eBay believes one of its key growth drivers in the future can be found in its past: collectables. Despite diversifying with the rise of Meg, the company never really lost sight of this cornerstone. In 1H21, two trading cards were sold on eBay every second and 63,000 new comic book listings were added daily in 2H21.
eBay believes this market is primed for expansion, and the facts seem to agree. Market Decipher estimates the global collectibles market was worth US$412b in 2021 and expects it to almost double to US$692b by 2032. To claim its share of this growth, eBay began authenticating trading cards valued at more than US$350 and, in March 2022, announced plans to build a vault to store physical and digital collectables.
The company has had success in snagging this market for its own since 1995, and it will likely continue to be a significant metric in its future growth. But remember: just as any responsible eBay bidder would do, always do your own research before you make a bid on any stock.