In Focus

eBay and an Up Nort* Story

I don't know if I've ever mentioned it before, but today seems like a perfect time to divulge. My favorite movie of all-time is Fargo. There, I said it. I'm out of the Minnesota closet as a Fargo lover. The plot of this movie is based on a true story out of Brainerd, Minnesota in which Jerry Lundegaard bungles his scheme to murder his wife. That alone is hysterical. Scandinavians can't possibly plan a murder. Due to the persistent police work of a pregnant cop by the name of Maaaarge Gunderson, Jerry is finally caught in a small motel in Fargo, North Dakota. (Jerry and Robert Blake have much in common. All Jerry needed was the talking bird.) The people of Minnesota often take offense when you mention the movie's greatness. You see, the writers poke fun of our Minnesota accent, our dwelling on the weather, and our northern way of life living through an eight-month blizzard. For some reason I love the warped humor of the Minnesota-born Coen brothers who wrote the movie.

Chick tip: One of the Coen brothers happens to married to the Oscar winning actress who played Marge. Yah, true story. Frances McDormand is married to Joel Coen.

Anyway, if you love the movie like I do, I've got a deal for you. Guess what's for sale on eBay? The cabin from the famous "woodchipper" scene!! Get out your checkbook. The 18 x 36 lakeshore (think frozen) cabin has a going bid of $7,000! (It has no running water, but you could get an outhouse. It's how we do it here in Minnesooooota, dontcha know. ) The owner of the cabin would like the shack moved from his property as he is building a new home on the site.

Chick Tip #2: This Stillwater, MN site is only 20 miles from where I live. I'm thinking about taking a drive, snapping a picture and posting it to this website.

This exciting auction item, in addition to eBay's first quarter 2002 earnings report this past week, I got to thinking about eBay (Nasdaq: EBAY). Just how are they doing? What is their business model? How have they fared through the tech-crash, and should the Chicks think about buying some stock?

In an eggshell, the eBay business model works like this: It's a huge mega mall/garage sale where individuals are able to auction their goods, from cabins in the woods to autographed hockey sticks on the eBay.com website. Businesses are able to market their brand new items from computers and jewelry to plane tickets and cars. You can buy anything on eBay. They provide customers the platform to sell their item and charge a fee for their service. It's like I rent you my world-visited garage for you to sell your hand made pillows and your kid's bike and I'll charge you five bucks a day. This is the super-stripped down version of their business model.

In their first quarter report, core revenues grew 58 percent over last year! By core revenues I mean, cash coming in from the above business model, the monies that are generated from the garage/website rental. Their other source of income comes from advertising revenues and auction services through online partners. Here's where they didn't fare so well. The revenues this last quarter from advertising grew only 8 percent, down from 13 percent the quarter before. According to eBay's CEO, Chick Meg Whitman (our own Chick Megan did an article on Meg not too long ago), "We have always said advertising revenues are the icing on the cake," she said. "They were never the cake."

The cake is in the cash, and bottom line, first quarter 2002 for eBay, was full of cash. By the day's end on Friday, the stock rose more than 2 percent due to their overall strong quarter. In the spirit of a hard working detective, I decided to run them through the Chicks Dozen for the past five quarters. (This doesn't include Friday's announcement of the increased revenues.)

I used our Chicks Dozen Worksheet to do the numbers above and was able to get the whole chart done in ten minutes. Get used to using the worksheet, have it do the math for you, write down the answers for each quarter, and then hit the "edit" button and go on to the next quarter. Simple as slicing up meat in a woodchopper.

Now, if we really look at the chart above, we might see a problem. Look at their net margins. From the same quarter a year earlier (12/31), their net profit or net margins are down 6.1%. When you do the math, it is actually a 34% decrease! (Looks weird, I know. Think about a baby that weighed 18 pounds and he lost 7 pounds. That would not be a 6% weight loss, but a 39% weight loss.) eBay's net margins were decreased by 34% over the year before. Net margins are the cash that is left over after all expenses are paid. eBay used to be pocketing almost 18 cents on every dollar, and now they are only pocketing 12. This was the beginning of the down slide of the stock. It went for $66.00 at the end of December, to a close of 54 today. You see, doing the charts and the numbers can warn you of some upcoming glitches, or at least an understanding of stock price movement.

Taking a look at all the other numbered criteria of eBay's Dozen, it looks like a pretty gosh darn good company. Gross Margins are higher than our Chick required 50%, they have a ton of cash, and their Flow Ratio gets better every quarter.

Overall, eBay looks like a Chick-worthy company with an interesting and profitable business model. I just might have to go up and take a look at that woodchipper cabin, make a bid, and star in my own movie. Yah, you betcha.

Chick Karin

*Up Nort: How us Twin City folks describe anything north of us.