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By Matthew Coffina, CFA and R.J. Hottovy, CFA | 04-10-2013 09:00 AM

EBay Worthy of a Bid

The Internet giant's network effect, mobile capabilities, and PayPal platform have it positioned for long-term growth, say Morningstar's Matt Coffina and R.J. Hottovy.

Matt Coffina: For Morningstar StockInvestor, I'm Matt Coffina. I'm joined today by R.J. Hottovy who is the director of our consumer team and we're going to talk about eBay and their recent Analyst Day. EBay is the second-largest position in StockInvestor's real-money Hare portfolio, but even if they weren't, this is a company I'd consider buying today. EBay has a rare combination of a wide economic moat, indicating a very strong competitive advantage, as well as a positive moat trend indicating that the competitive advantage is getting stronger over time, and exemplary stewardship.

R.J., thanks for joining me.

R.J. Hottovy: Thanks, Matt.

Coffina: Could you tell me a little bit more about eBay's economic moat, the reason that it's so strong and the reason that it's strengthening over time for our viewers who may not be as familiar with the story?

Hottovy: Yeah, absolutely. I think it comes down to, this is one of our classic network-effect stocks, where essentially the more users that are on eBay, the more valuable it becomes for all users. This has traditionally been in the auction business, where the company was able to attract a wide network and a wide amount of buyers and sellers. But I think that a lot of the same things that made their auction business so successful is now translated into third-party sales on its Marketplaces. The network effect also pertains to their PayPal business where as more and more people have been accepting and using PayPal, it becomes more useful for merchants to facilitate that ability. And so, I think it really comes down to this is one of our best examples of a network effect, which tends to be one of the stronger sources of competitive advantages that we find across our entire coverage universe.

Coffina: So, the Marketplaces segment in particular really seemed to be slowing down a few years ago, but ever since John Donahoe came in as CEO in 2008, growth has really accelerated there, and then PayPal has also been really strong. But specifically with respect to the Marketplaces segment, what is eBay doing right?

Hottovy: I think you're absolutely right. They've done a great job transforming that business. Traditionally this company had been known as online auction house, and I think they've done a great job reinvigorating the image of its Marketplaces business. I think it comes down to a number of just, for lack of a better phrase, "blocking-and-tackling-type" initiatives. One being, just improving the overall search capabilities and just making the user experience that much more friendly for anybody who is on eBay. They have also increased the number of free shipping offers that are out there. They've done a great job just cleaning up the site in general. They have a lot of mobile-device capabilities that I think are starting to resonate with smartphone users.

And they've made a lot of smart acquisitions too in the last couple of years, whether it'd be allowing local companies, whether it'd be small mom-and-pop shops to integrate their inventories with the eBay system or allow for same-day delivery or even private-sale sites. I think a combination of all those factors has not only made it a more attractive destination for a lot of third-party merchants, a lot of fashion houses are using eBay more and more as a distribution outlet. But it's also become a more relevant destination for shoppers these days as well, and again, just underscoring the network effect that is the linchpin of our wide economic moat for this company.

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