The Motley Fool: eBay operates in a growing industry
The Motley Fool Take
E-commerce is one of the most promising industries around. Accounting for a modest 7.5 percent of all retail transactions in the United States, it has a lot of room for growth. Within the e-commerce world, eBay (Nasdaq: EBAY) has lagged industry leader Amazon.com in revenue growth over the past several years, but its stock has recently been reasonably priced and is worth consideration.
EBay has fat net profit margins topping 20 percent in part because of its compelling business model: It operates a massive marketplace without walls or inventory or sales clerks. Better still, it’s implementing multiple initiatives to accelerate growth, and its most recent financial report suggests that these moves are generating the desired results.
Sales growth is accelerating and profit margins are increasing. EBay has been improving its product inventory and giving more visibility to unique items on the platform. In addition, sellers are required to provide more and better product descriptions to improve the shopping experience. It’s adding more name brands to its platform and is introducing new nooks, such as eBay Wine.
Meanwhile, management is educating sellers on inventory gaps and strategies to generate better rankings in search results. If eBay can deliver on accelerating growth, then its stock should offer plenty of upside potential for long-term investors. (The Motley Fool has recommended and owns shares of eBay and Amazon.com.)
Ask the Fool
Q: What does it mean if an IPO is underpriced? - K.V., Binghamton, New York
A: Let’s first review how an initial public offering (IPO), when a company first sells its stock on the open market, works. The company will generally hire an investment bank (such as Goldman Sachs or Morgan Stanley), which may then bring in other underwriters.
The upcoming IPO is registered with the Securities and Exchange Commission and a prospectus is issued, offering financial statements and information about the company’s health and performance to the public and potential investors. The investment banks then woo big investors, generating interest in the company.
As the IPO date approaches, the company and the banks come to an agreement on how to price the shares. For example, imagine that they have decided to sell 10 percent of the company to the public in 100 million shares - reflecting a total share count of 1 billion shares. If they agree that the company is worth $10 billion, then each share would be priced at $10, and their 100-million-share offering would bring in $1 billion for the company.
If the shares skyrocket on the IPO day, that suggests they were underpriced and could have generated more money for the company.
Q: Which mutual funds pay shareholders the most? - D.P., Adrian, Michigan
A: Look for “income” funds, which invest chiefly in dividend-paying stocks or in interest-paying bonds. Other kinds of funds (such as “growth” or “value” ones) aim to reward shareholders mainly via stock price appreciation - though they may also feature some dividend or interest income.
To see high-quality, low-fee mutual funds we recommend, try our “Rule Your Retirement” newsletter for free at fool.com/shop/newsletters.
My Dumbest Investment
Having received the worst stock tip ever in the form of sage advice from a day trader, I sank $2,000 into a U.S.-based Indian filmmaking company. You may be laughing already. Needless to say, the curry in my cabinet is now worth more than all the stock. I learned to be less gullible when it comes to snake oils and divining rods. - M.Y., Atlanta
The Fool responds: Your story is chock-full of lessons. For starters, filmmaking isn’t necessarily a bad business - just ask Disney. But not all filmmaking companies are alike. You should want any company you invest in to have a proven track record of revenue and profits - and ideally for both of those to be growing.
Taking advice from a day trader is not usually advisable, as they practice short-term speculation instead of long-term investing, and though they may occasionally hit a home run, they typically get washed out.
You’re right to now be skeptical of snake oils and divining rods - which usually pop up in the stock market in the form of penny stocks, priced at a few dollars or pennies per share. They’re frequently hyped, with promises of imminent gold, or oil discoveries, or major medical breakthroughs. This sends their shares up, only to crash again, wiping out many naive investors.
For best results when investing, seek established companies whose businesses you understand well.