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EBAY:FUNDAMENTAL ANALYSIS + NEXT TARGET | MUST READ

Last month, the online marketplace eBay acquired a specialty NFT marketplace called KnownOrigin. The press release stated that KnownOrigin is the "leading" NFT marketplace. As a cash-rich company, eBay was well positioned to finance this acquisition.

However, with limited growth opportunities, the company must be careful not to lose focus on shareholder returns. And the purchase of KnownOrigin is likely a step in the wrong direction.

There are three basic phases in the life cycle of a public company: the need for capital, self-financing, and returning capital to shareholders. In the first phase, loss-making companies receive funding from banks and shareholders to build the business in hopes of achieving scale. In the second phase, companies have achieved enough scale to generate positive cash flow, but they continue to invest all available resources to grow the business. In the third phase, growth opportunities are limited, so cash flow must be used to reward shareholders.

These phases exist at different levels, and their borders do not have clear lines. For example, a company can return some capital to shareholders while still investing in growth. But the main point is that investors need to know what phase of the life cycle the company is in order to evaluate opportunities. Stocks in each phase can be good investments if management uses cash wisely.

As for eBay, it is in phase three because growth opportunities are limited. Consider that in the fourth quarter of 2017, the company generated $2.7 billion in revenue. In the fourth quarter of 2021, it generated only $2.6 billion. In short, quarterly revenue is down almost 4 percent over that time period.

However, eBay's earnings per share rose 62% during that time as the company's management bought back billions of dollars worth of its own stock.

Even though eBay is no longer growing, it is still a cash-generating machine. As a marketplace, the company doesn't keep inventory, which keeps costs low. It simply connects buyers and sellers and charges a fee. That's why the company's free cash flow (FCF) margin was 25% in 2021 - few businesses have higher margins.

Through buybacks, shares are withdrawn from circulation and the remaining shares become more valuable - thus rewarding eBay shareholders. The company also pays a fast-growing dividend - up 58% over the past five years - which helps boost overall returns. This is a great use of cash by eBay management.

As of Q1 of 2022, eBay has $4.7 billion left in its stock repurchase plan. Given that its current market capitalization is only $24 billion, this plan is significant. But the company has enough resources to execute it. The company has more than $5 billion in cash and short-term investments on its balance sheet, a quarterly FCF of more than $500 million, and $5.3 billion in long-term investments in other e-commerce and financial technology companies.

We hope you anticipate eBay's potential to return capital to shareholders in the coming years. It could be a path to earnings that exceed the market. That assumes, however, that management won't be too distracted.

By acquiring KnownOrigin, eBay may be distracted from its goal. Terms of the deal have not been disclosed, but it is likely that the company paid a price that was well within its means. However, even if it is acceptable, the NFT market space is hardly a path to growth. That's why many people don't like this acquisition. What's more, according to DappRadar, KnownOrigin ranks only 41st among NFT marketplaces by volume - at least in the last 30 days.

We don't have time to delve into the rabbit hole of NFT. But suffice it to say that NFTs can be more than just a collector's item. They can be used for record-keeping, live event ticketing, reservations, and more. But it doesn't sound like eBay is interested in this potentially innovative side of the NFT market.

The company is interested in NFT collectibles and has been experimenting in that direction since May 2021. But according to NonFungible, NFT sales (in dollars) have dropped 90% over the past year. The number of unique customers is also down 42%.

Management's desire to stay relevant is understandable. But if eBay doesn't find real growth opportunities, it should focus on shareholder returns. Given current trends, NFT collectibles will not be what management had hoped for. And so jumping into this space could distract management from making the best use of its cash at the moment.