This week we put a spotlight on a company in the Global High Conviction Strategy at TAMIM Asset Management, led by Portfolio Manager Robert Swift. While it may not be the first company that springs to mind, it should need no introduction to most Australians (at least those over the age of 30): eBay (NASDAQ: EBAY).

eBay has had a remarkable/colourful history since its founding in 1995 in San Jose, California. It IPO’d back in 1998 as the Internet was truly emerging, and has lived through the tech bubble of the 2000s, the Global Financial Crisis and more recently the coronavirus pandemic. Yet its business has remained largely unchanged. For those unfamiliar with the platform, it is an online marketplace for buyers and sellers in more than 190 markets around the world. It operates a variety of websites (including the core www.ebay.com) and associated device apps that connect buyers and sellers and allows for advertising of items, collection of payments, and reviews of the success (or otherwise) of the transaction. Historically it was more commonly used for the exchange of second-hand and unique items, such as the booth from the Sopranos finale that recently sold for a whopping US$82,600!

eBay might be smaller than some other online eCommerce powerhouses such as Amazon and Alibaba, but in 2023 it still generated revenue of US$10.1 billion, up 3% year-on-year (YoY) on a reported basis and 4% excluding the effects of foreign exchange. Having been founded in the United States, this is obviously a major focus for the company, but today generates approximately half of its revenue from outside the United States–from the likes of the United Kingdom, Australia and Germany.

This US$10.1 billion in revenue was generated by the exchange of US$73.2 billion of what the company calls “Gross Merchandise Volume,” or the total value of the goods bought and sold during the year. (From these numbers, you can see that the average “take rate” or percentage of the transaction taken by eBay was 13.8%, a very healthy number that is similar to online booking platforms such as the 13.5% at AirBNB [NASDAQ: ABNB], but lower than the 25%+ at ride-sharing platforms like Uber [NASDAQ: UBER]).

One thing to take note of when analysing the results of eBay or most other technology companies is the difference between its reported (or statutory) earnings and what the company calls “non-GAAP” (or adjusted) earnings. Generally Accepted Accounting Principles (GAAP) are basically the rules that govern how companies account for and report their profit, cash flow and statement of financial position (or balance sheet) in the United States. These principles are necessary and allow prospective investors to compare companies like-for-like. While they sometimes get a bad rap, non-GAAP metrics often also provide investors with useful information about the underlying workings of a business that may be unique to a specific company or obscured by GAAP reporting

In 2023, eBay’s GAAP operating margin was 19.2% compared to a non-GAAP operating margin of 27.4%, a very significant difference. If you’re interested in investing in a company, it’s important to delve into this discrepancy and assess whether the adjustments the company is making are fair and whether the expenses are likely to recur again in the future. Some of the most common examples are restructuring (redundancy) costs, legal and litigation costs, amortisation of intangible assets (usually from acquisitions), and one that gets the most attention, stock-based compensation.

In 2023, eBay produced nearly US$2.8 billion in non-GAAP operating income at a margin of 27.4%, which flowed through to total net profit after tax (NPAT) of US$2.3 billion, or earnings per share (EPS) of US$4.24. A quick way of measuring whether these adjustments seem fair is to compare against the company’s free cash flow (FCF), which is typically calculated as operating cash flow (OCF) minus capital expenditures on property, plant and equipment (aka CapEx). For the full year, eBay generated a very healthy US$2.4 billion in OCF and $2.0 billion in FCF–successfully passing the first test on its adjusted numbers.

Shareholders were once again well-rewarded, with the majority of this cash flow being paid out during 2023. In total, eBay repurchased US$1.4 billion of the company’s shares and paid US$528 million in dividends. eBay followed some of the big and profitable tech companies such as Apple (NASDAQ: AAPL) in initiating a dividend in 2019, which now equates to US$0.27 per share per quarter, or a yield of just over 2% at the current share price.

More capital return was one of the key demands alongside a major restructure of eBay that occurred back in 2015 at the behest of activist investor Carl Icahn (who leads the hedge fund Icahn Enterprises and is often thought of as a ‘corporate raider’). The biggest aspect of this restructure was the separation of eBay and payment processor PayPal (NASDAQ: PYPL), which eBay had owned since acquiring it in 2002 for just US$1.5 billion.

Icahn was more focused on the possibility of generating outsized investment returns from PayPal, which he (and others) believed would be able to secure deals with more online merchants and marketplaces if it operated on a standalone basis. Interestingly, this also opened the door for eBay to change its payments arrangements, signing a deal with Dutch-based payments giant Adyen NV (AMS: AYDEN) in 2018. While eBay buyers and sellers are still able to use PayPal (and many do), they also now have the option to use other payment methods, such as direct debit and credit card transactions, Apple Pay, and various Buy-Now-Pay-Later options (such as Afterpay [ASX: SQ2]). This has been a boon to the company, allowing it to reduce its own expenses while simultaneously reducing the costs for sellers (PayPal is one of the more expensive payment processors) and increasing buyer choice.

Another key development has been eBay’s advertising initiatives. Like Amazon, over quite a number of years eBay has built up an internal advertising platform that allows sellers to promote their wares directly to eBay customers–rather than relying on search engines like Google (NASDAQ: GOOG) to fill this need. This is a win-win for the company. It leads to higher sales by making the active eBay buyer base of 132 million users aware of more products they might be interested in, as well as generating significant advertising revenue. In fact, first-party advertising products delivered US$368 million of revenue in 4Q 2023 alone, up 33% YoY (33% ex-FX).

There’s no doubt that the world has come a long way since eBay was founded, and today the eCommerce market is far more competitive. This includes the more obvious juggernauts of Amazon and Alibaba, along with more niche players such as Etsy (NASDAQ: ETSY) and Canadian powerhouse Shopify (NYSE: SHOP) that enables smaller sellers to compete.

Yet eBay has continued to endure and evolve, progressively migrating to a seller of new (as well as used) goods and eventually a full store experience for many brands (including validation services for luxury goods). It has developed its payment offering, providing more buyer choice and lower seller costs, and launched a fully integrated advertising platform–generating high margin revenue and boosting sales.

On the investment front, it has simplified its structure, separating out PayPal and selling off its investment holdings, and demonstrating its strong cash generation and shareholder-friendly attributes–returning substantial amounts of capital through both share buybacks and dividends.

While it might not be as sexy as Amazon or Alibaba, it also doesn’t come with the same luxury price tag.

Disclaimer: Google (NASDAQ: GOOG) and eBay (NASDAQ: EBAY) are currently held in TAMIM Portfolios.