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The Spokesman-Review Newspaper
Spokane, Washington  Est. May 19, 1883

Business model gives eBay advantages on multiple levels

Online giant eBay maintains a huge marketplace, where millions of items are sold by auction or fixed price. (Associated Press)

There aren’t many business models lovelier than eBay’s (Nasdaq: EBAY). Whereas traditional retailers have to build and support brick-and-mortar stores, eBay does not. While even has to stock massive distribution centers, eBay does not.

Instead, eBay maintains a huge online marketplace, where millions of items are sold by auction or fixed price. Its customers carry the inventory, helping it keep costs low. Its network size gives it a competitive advantage, too, as sellers favor eBay because that’s where millions of buyers are, and vice versa. Better still, eBay owns PayPal, an electronic money-transfer business that has posted transaction volume growth of more than 20 percent year over year for 17 quarters in a row.

In its last reported quarter, the company topped earnings expectations as it tacked on 4.7 million new buyers for a total of 147 million active buyers. PayPal gained 5.8 million new accounts, for a total of 148 million active registered accounts. With billions in eBay’s coffers, some investors hope that the hefty cash generator will make some profitable purchases.

EBay’s stock is appealing, sporting a forward-looking price-to-earnings (P/E) ratio recently near 15. It’s not without risk, though, as both PayPal and eBay’s e-commerce business are facing competition, and eBay Marketplace’s growth rate has been slowing. (The Motley Fool owns shares of and has recommended and eBay.)

Q: Some of the stocks your newsletters have recommended have lost a lot of their value. Why haven’t you sold? – T.N., Mobile, Alabama

A: Most of our premium services have at least a few recommendations in the red, just as any investor isn’t likely to avoid every stock dip. If you look at the list of recommendations from our “Million Dollar Portfolio” (MDP) service, you’ll see some stocks in the red by 20 percent or more, along with a bunch that are up more than 100 percent.

Portfolio components can vary widely in performance, which is why money should be spread across more than a few holdings. A few big winners can more than make up for losers.

Not every fallen stock is a loser, though. Many simply require patience through a temporary slump. One MDP pick, Tile Shop Holdings, was recently down around 20 percent since being recommended. Yet our analysts still expect great things from the company. It has faced some questions about its governance recently, but it’s making promising changes. It’s also aiming to open 20 new stores in 2014, bringing its total to 108.

Q: A year or so ago, two companies in the same industry had similar stock prices. But over the past year, one rose while the other fell. What’s going on? – F.R., Hygiene, Colorado

A: No two companies are exactly the same, even if they’re in the same industry. Different companies will have different performances, assets, debts, competitive advantages and prospects. Their profit margins will likely vary, as will their sales and earnings growth rates. Also, either or both might be over- or undervalued right now, and may be headed up or down. The similar prices were just a coincidence.

My dumbest investment

My dumbest investment happened some 30 years ago, when I bought into a limited partnership focused on thermal energy. It was claimed that I’d quadruple my money, so I put $5,000 into it. The company didn’t generate income, but I got stuck with “phantom income” of $15,000 that I had to pay taxes on. Don’t ask me to explain. And I was a stockbroker. – J.J., online

The Fool responds: We’ll explain. Phantom income isn’t common, but it does happen on occasion, in investments such as limited partnerships. Backing up a bit, understand that at a traditional corporation, the company is taxed on its income. Partnerships, though, are “pass-through” entities, where income flows directly to partners, who are then taxed. A K-1 form generally arrives annually, detailing a partner’s share of the partnership’s income or loss.

Sometimes the income isn’t actually received by the partners, though, as it might have been reinvested in the business. Still, they’re on the hook for its taxes. Zero-coupon bonds and forgiven loans can also generate phantom income. Learn much more about partnerships before investing in any. They can be tricky.