eBay, Inc.

Investment Notes
EBAY

Please see disclaimer at bottom of this document

February 24, 2006 Review of 10-K

1. Shares outstanding

31-Dec-00	1,121,384
31-Dec-01	1,122,380	0.09%
31-Dec-02	1,171,280	4.36%
31-Dec-03	1,313,314	12.13%
31-Dec-04	1,367,720	4.14%
31-Dec-05	1,393,875	1.91%
17-Feb-06	1,406,718	0.92%

2. Number of employees

Date	Total employees	US Employees
30-Sep-05	11,600	6,500
30-Sep-05	9,300	6,200
31-Dec-04	8,100	5,900
31-Dec-03	5,700	4,200
31-Dec-02	4,000	3,100
31-Dec-01	2,560	2,560

3. Users

	1Q03	2Q03	3Q03	4Q03	1Q04	2Q04	3Q04	4Q04	4Q05
Registered Users (millions)	68.8	75.13	85.5	94.9	104.8	114	125	135.5	180.6
Seq. Growth	11.50%	9.40%	13.50%	11.00%	10.40%	8.80%	9.60%	8.40%
YoY Growth	55%	47%	47%	47%	52%	51.40%	46.20%	42.80%	33.28%
Active Users (millions)	31.1	34.1	37.4	41.2	45.1	48	51.7	56.1	71.8
Seq. Growth	12.30%	9.60%	9.70%	10.20%	9.50%	6.40%	7.70%	8.51%	0.00%
YoY Growth	50.00%	47.00%	47%	47%	45%	41%	38%	36.17%	27.99%
% of Active Users	45.20%	45.40%	43.70%	43.40%	43.00%	42.10%	41.40%	41.40%	39.76%

4. cumulative eps

Fiscal Year	eps as reported	effect on eps if stock options were expensed as compensation (this is not the same as sfas 123r)
1998	$0.01	$0.01
1999	0.01	-0.05
2000	0.05	-0.09
2001	0.08	-0.11
2002	0.22	0.06
2003	0.34	0.19
2004	0.57	0.43
2005	0.78	0.61
Totals 1998 – 2005	$2.06	$1.05

5. It looks as though ebay will use up all of her Net Operating Loss Carry-forward’s in 2006/2007. From a reporting perspective, that is a positive. Basically, because of stock option compensation and other reasons, ebay has never paid corporate income tax. Now ebay will have to start shelling out tax money. This will not effect eps, as taxes are being provided for, via accruals. It will certainly have an effect on cash available. Nevertheless, a healthy problem to have. Yet, this might crimp what appears to already be a generous valuation.

Fiscal Year	Federal NOL (begins to expire)	State NOL (begins to expire)
2005	$70.1M (2019)	$ 67.5M (2006)
2004	$605.8M (2019)	$138.6M (2006)
2003	$502.6M (2019)	$238.8M (2006)
2002	$559.4M (2019)	$133.1M (2006)
2001	$345.1M (2019)	$149.8M (2004)
2000	$274.9M (2019)	$128.0M (2004)
1999	$192.9M (2019)	$ 99.1M (2004)

Return on Equity = Net Income X Sales X Assets
Sales Assets Equity

2005	10.77%
2004	11.57%
2003	9.02%
2002	7.03%
2001	6.03%

7. Quick back of envelope valuation scenarios. These have not been tested and could certainly be error filled.

EV Analysis
	February 24, 2006
Share Outstanding	1,407.00
Share Price	$41.00
Market Capitalization	$57,687.00
Less: Cash and Short Term Investments	($2,089.00)
Add: Long Term Debt	$0.00
Minority Interest	$0.00
Enterprise Value	$55,598.00
EV per share	$39.52
Stockholders’ Equity	$6,728.00
Adjustments:
Goodwill	($2,710.00)
Tradenames	$0.00
Other Intangibles	($363.00)
Net Stockholders’ Equity	$3,655.00
Book Value per Share	$4.78

I used 33% for the Net Margin , less the $0.16 – $0.17 per share that ebay mentioned in 10K would be the SFAS 123R effect of stock option compensation.

Quick Projections 2006	February 24, 2006
Revenue	$5,900.00
Net Margin % before tax	28.00%
Net Margin before taxes	$1,652.00
Tax Rate	30.00%
Corporate Taxes	$495.60
Net Income after Taxes	$1,156.40
Net Margin %	19.60%
Shares Outstanding	1,407.00
eps	$0.82

FV of current equity and future earnings	24-Feb-06
Tangible Book Value	$6,728.00
Net Profit	$1,156.40
Growth Rate of Net Profit for 10N	15.00%
Growth Rate of Net Profit after 10N through 15N	5.00%
FV of Net Profit in 10N	$4,678.28
FV of Net Profit in 15N	$5,970.81
FV of tangible book value plus Net Profits for 10N	$50,697.73
FV of tangible book value plus Net Profits for years 11 – 15N	$90,555.05
Current Enterprise Value	$55,598.00
FV of tangible book value plus Net Profits for 10N	($50,697.73)
Years	10
ROI on tangible book value plus Net Profits for 10N	-0.92%
FV of tangible book value plus Net Profits for 10N	$50,697.73
FV of tangible book value multiplier	2.00
FV of Tangible Book Value using BV multiplier in year 10	$101,395.46
Current Enterprise Value	$55,598.00
FV of tangible book value plus Net Profits for years 11 – 15N	($90,555.05)
Years	15
ROI on tangible book value plus Net Profits for 15N	3.31%
FV of tangible book value plus Net Profits for 15N	$90,555.05
FV of tangible book value multiplier	2.0
FV of Tangible Book Value using BV multiplier in year 15	$181,110.09
Potential Future EV using BV multiplier above
Current Enterprise Value	$55,598.00
FV of Tangible Book Value using BV multiplier in year 10	($101,395.46)
Years	10
ROI on FV of Tangible Book Value using BV multiplier in year 10	6.19%
Current Enterprise Value	$0.00
FV of Tangible Book Value using BV multiplier in year 15	($181,110.09)
Years	15
ROI on FV of Tangible Book Value using BV multiplier in year 15	8.19%
Sanity Checks:
P/E in future
FV of Net Profit in 15N	$5,971
P/E estimate	15.00
Market Cap on above	-$89,562
Years	15
Current Enterprise Value	$55,598
ROI in 15N using above	3.21%
Potential Revenue Growth
Current Revenues	$5,900
Growth Rate of Revenues for 10N	15.00%
Growth Rate of Revenues after 10N through 15N	5.00%
FV of Revenues in 10N	($23,869)
FV of Revenues in 15N	$30,463
FV of Revenues in 15N	$30,463
Revenue Multiplier based on Al Meyer Rule of Thumb net margins	4.5
Possible Market Cap year 15	($137,085)
Years	15
Current Enterprise Value	$55,598
ROI in 15N using above	6%

January 20, 2006 some Skype notes (46.52)

1. Doing some Skype research. CNET has decent reviews. Certainly concerns, but concerns seem more of VOIP security infrastructure concerns and not Skype specific. From the little I read so far, it seems as though Skype is geared into all security concerns, and looking to correct them. I did a search for Skype and found the following tidbits:

a. “Fueled by the growing popularity among consumers of audio communications over the Internet, using services such as Skype’s, Logitech’s retail sales of PC headsets grew by 90 percent year-over-year.” (LOGITECH INTERNATIONAL SA 1/19/06)

b. “We do not compete with providers of free VoIP service, for several reasons. Firstly, all free VoIP providers (e.g. Skype, Yahoo and Microsoft) offer only computer to computer or computer to phone services. With our service, all one needs is a high speed connection (via a fixed line or wireless modem), an ibox, a power source and a telephone – a computer is not necessary. Secondly, the free services provide a software solution. We provide a hardware product that our customers can take with them to make calls from other locations. Once activated, the ibox can transmit and receive data via Galaxy Telecom’s server/network. The ibox itself is portable and can be connected to another high speed connection/modem and telephone at a remote site. Finally, we have a very specific market (hotels, cable companies, SOHO enterprises, multi-office enterprises, etc.) that we know well and we focus on selling to this specific market, while the providers of free VoIP service target the extremely broad universe of all PC users.” (PROJECT ROMANIA INC. 1/6/06)

c. “There are many competitors in providing VoIP services in America today. These Companies include AT&T, Vonage, Skype, Yahoo and Google. VoQal feels that the Company has several advantages that will allow it to compete successfully against large competitors. Most of the Company’s competitors have invested huge amounts of money in infrastructure to provide global VoIP services to their customers. We anticipate that they are forced to keep their gross margins high to help amortize their capital investments, they must also maintain low volume low profit services and connects and subsidize those connections through their higher volume more profitable long distance routes.” (VOQAL COMMUNICATIONS INC 12/20/05)

d. “International calls made with the PC to regular landlines are already cheaper with BT Communicator than with rivals such as Skype. However, as a Christmas present to its customers, BT will be offering free calls throughout the festive holiday to any landline in 30 different countries.” (BT GROUP PLC 12/19/05)

e. “There has recently been substantial market interest in providers of Internet telephony services, possibly suggesting that a sale of Net2Phone could arouse similar interest. In particular, eBay has recently announced an acquisition of Skype for between $2.6 billion and $4.1 billion. Vonage raised approximately $200 million in a private equity offering in May 2005 and is reportedly considering a sizeable initial public offering. However, IDT believes that the Skype and Vonage situations are not comparable to Net2Phone’s circumstances, primarily because these companies have spent considerable sums on securing their subscriber bases, which are considerably larger than the subscriber base of Net2Phone. ” (NET2PHONE INC 12/13/05)

f. ” The telephony market is characterized by increasing price reductions and commoditization of voice and related service offerings. The Company believes that successful VoIP service providers will need a variety of value-added services in order to favorably compete in these markets. Upon the development of adequate capitalization it is the intention of the Company to focus on the development of these value-added services along with the addition of new customers and the increased penetration of its current customer base. Ecuity’s present and future competition in the VoIP market includes several large and well-capitalized companies such as AT&T, Sprint, MCI, Allegiance, SBC, Qwest, Vonage, Skype and numerous others. Competition is also expected from cable companies such as Comcast, Charter, Cox, as well as telecommunications companies with cable operations and operating agreements, including SBC and Qwest and internet and internet related service providers such as AOL and EBay. Virtually all of the Company’s competitors have much greater financial resources and capabilities than Ecuity.” ( Y3K SECURE ENTERPRISE SOFTWARE INC 11/17/05)

g. “Skype Joint Venture (“JV”) — On September 5, 2005, we announced that we had established a joint venture with Skype to develop next-generation communication services in the mainland China market. The initial stages of our JV will be to focus on the development of a more localized TOM-Skype client for the mainland market and to grow our user base. At the end of October 2005, we had over 5.2 mn registered TOM-Skype users, up from the 3.4 mn registered users we had at the time we announced the JV. In the coming quarters, we also hope to begin to develop premium services over the TOM-Skype platform.” (TOM ONLINE INC 11/15/05)

h. “We anticipate increased revenue and demand to be generated in our near-term horizon from services including VoIP, increased roaming, location-specific applications, targeted advertising platforms, high-bandwidth content delivery and management, and access to proprietary content. With respect to VoIP, a small but steadily growing customer base has been utilizing VoIP technologies and services over our Wi-Fi networks, and we expect this trend to improve as additional services and VoIP-enabled devices are propagated into the marketplace. This trend is in keeping with broader industry trends, such as the recent Skype/Boingo VoIP over Wi-Fi trials which will include ICOA’s assets in the near future. With respect to ancillary revenue from roaming, ICOA’s recently achieved national scale provides the company with attractive locations of strategic roaming value to other wireless service providers. Our networks were designed as neutral-host specifically to prepare for roaming, a strategy which maximizes revenue-potential from the existing asset base.” (ICOA INC 11/14/05)

i. “Linksys, a division of Cisco Systems, and Skype teamed to launch a new cordless handset designed to enable users to place Skype Internet phone calls while sitting at home or at the office. ” (CISCO SYSTEMS INC 11/09/05)

j. “There is a revolution taking place in voice communications. Actions such as eBay’s announced plans to purchase Skype are fueling the inevitable change in voice communications,” Carabelli said. “For well over a year, we have been positioning Pac-West to compete and grow in this emerging environment by offering the required services to allow any company to become a custom phone company.” (PAC-WEST TELECOMM INC 11/3/05)

k. “This quarter was also marked with many successes. We began deployment of one of the largest VoIP broadband networks in the world with our partner Aksh broadband and we won an expansion with Cable and Wireless in Panama, which is experiencing significant growth as a result of our I-Master prepaid solution. Additionally, we introduced exciting new market-driven technologies such as the Skype Peer to Peer monitoring and control application and the Metronet bundle solution for metro broadband networks. The Skype filter has generated a great deal of interest from the industry as well as our carrier customers and the Metronet bundle, despite its recent introduction, has already achieved strong market interest as evidenced by some early wins. In conclusion, we have the people, products and market demands to show continued growth and reach our goal of EBITDA profitability as soon as possible.” (VERSO TECHNOLOGIES INC 10/31/05)

l. “So Skype. In addition, the third quarter we announced two new and important new business initiatives. Firstly, as many of you know, we announced our 51% to 49% joint venture with Skype to be all of TOM/Skype in mainland China. At the end of October we had over 5.2m registered TOM/Skype users, up from the 3.4m registered users at the beginning of September when we announced the joint venture.

Our first target for Skype is to continue to grow the unit base and continue our discussions with the Chinese telecom operators on ways we may be able to cooperate on Voice over IP value-added services. It is our hope that over the coming quarters we will develop premium Skype services for the mainland China market, but we will only do so where the regulations allow us to do that.

For the mobile payment issue, UMPay, in addition to Skype, we also announced our strategic cooperation with UMPay to develop mobile payment services in China. For those of you who are not familiar with UMPay, UMPay was founded in 2003 by China Mobile and China UMPay as the only inclusive payment gateway between China banks — China’s banks’ card system and the China Mobile.

We believe that this is a largely an important milestone for our Company, as we hope that through this cooperation we will be able to complement our leadership in mobile content by broadening our service offerings to our users into mobile functions, firstly as payment as well.” ( Q3 2005 TOM ONLINE INC Earnings Conference Call)

m. “Yes, I mean– Well, when you get to my age, everybody keeps you up at night, David. I think that– well, look, if this is a broader question, this is “The Economist” article with Skype and VoIP and everything else? Look, all those technologies, sometimes people call that technologies. All those applications, let me deal with them in a broad sense.

I think they all tend to be disruptive products and services that interfere with revenue streams. So let’s look at Skype. Skype is pretty cool. They’ve got a software. They know how to– people could download. They’ve got millions and millions of people that do it, but when Skype merges itself or gets bought by eBay, that reinforces our belief in something, because what it says is that their value proposition doesn’t work unless they broaden the product and service to the customers.

They will need a broadband connection. So when someone says voice calls will be free, the problem with that is somebody still has to have a broadband connection and the network to pay for it in access. So I think that– I look at a Skype as an application that, over time, drives demand for broadband. We’ll offer similar things as part of our package, but also the fact that Skype marries itself up to eBay, I’m sure that Google and Yahoo! and everybody else will figure out a way to try to add some value to their basic package, because there’s a cheap way of providing a feature and functionality, but everybody’s going to require the broadband. So I think that comes.

The VoIP providers, the way I would comment that is that’s also a cool thing. You know, when you introduce a new product in the market place, you’re always going to get the technology– technocrats, so to speak, to shift right way. So you’re going to 10% or 15% of the market to try it.

And so our view is this. The stand-alone, over-the-top, single-product voice– voice providers will be OK. I mean, they’ll scale to a certain point. Their business models will– will run into a little difficulty and then they’ll have to deal with it by selling or whatever they do.

If you look at Vonage, I think that they just announced they’ve got a million customers. They have a significant number of them internationally, so we’re not particularly worried about, while it’s annoying and they do OK, they’re not eating away all our growth. They’re doing– I mean, they’ll run into some headwind at some point.

Where VoIP becomes an issue is when you bundle VoIP with a broadband connection you do shift the way we make money away from the old voice to a data platform. And the answer to that is, the cable companies are going to do it. That’s their legitimate entry into the market. That’s the reason why we have gone after the stand-alone teleco line with a $14.95 DSL connection and we’ve gone after the building of the FiOS.

So I think these things are all things that eat away at growth, but they aren’t fundamentally things, David, that will displace the strategies we’ve put in for the future and I think that’s kind of the way I look at it. So you never discount the capabilities all of these entrepreneurs are putting into it, but we have a core response. It’s superior wireless business and it’s a broadband business and I think we can– we can achieve success doing what we do.” (Ivan Seidenberg, Verizon Communications – Chairman and CEO 09/22/05)

n. “We’re very happy with the partnership. It’s actually not applicable to Webcams today. It’s applicable to headsets. And Chris said, the PC headsets has been a big component of our audio growth. I expect that in general, Voice over IP will have a huge — the combination of Voice over IP as people refer to it, Skype for other services, as well as MSN 7.0, which is video and Voice over IP if you want. So it will be a big driver of headset and Webcams in general. Our Skype partnership is currently a headsets partnership. We are looking forward to working with Skype and others. There is so much interest in video and audio that we could spend another two hours talking about the opportunities in that space. I will leave it at that. I would say that everybody wants to do video and audio for the time being. Microsoft is the only one that does it well because it’s powered by our technology. Other things could happen.” ( Guerrino De Luca, Logitech International – President & CEO 4/19/05)

o. “I wish I understood their business model or the revenue model. Bundling is the best answer to that because the consumer wants a convenient, one-stop, complete service. How one sustains a revenue model with no revenue, I don’t know. And so we’re kind of all scratching our heads. Clearly, Vonage has been around awhile and has not gotten really much traction vis-a-vis impacting the VoIP business domestically. It’s a question of whose facilities are going to ride (ph) them. It’s kind of the over-the-top question versus the bundle. Are there going to be services that are available to the consumer over the top? And does that shift the pricing to where the facilities-based guy gets more money for one class of service and discounts the other one to the point where he makes the over-the-top offer less attractive. So I think it’s a shifting around, perhaps, but there are nominally, what, 30 million Skype customers in the world, and I don’t know that that it’s impacted any cable models yet domestically.” (John Malone, Liberty Global, Inc. – Chairman 09/28/05)

June 9, 2005

Ebay at DBS Media conferences

1. As I read the transcript, I read the history from Ravi Dutta, CFO, and I think to myself, why is he traveling around talking about his company. Shouldn’t CFO’s be focused on operational matters. Then I think again, as I just typed that, and the road show is operationally important to eBay, for they need to keep the stock price up, so that morale is okay, because historically ebay employees have attained wealth via stock options and not salary. Ain’t that America. eBay that is described in lots of detail below, generates soooooo much cash via sales of stock to her own employees. So, ebay continues to be smart, as the most important thing operationally for them (other than revenues) is an accelerating stock price.

2. Advertising revenue is about 1 – 2% of revenues.

3. Discusses Shopping.com purchase

4. Talked about PayPal’s future.

5. Shopping.com purchase should be reviewed. You might find that ebay paid one multiple and as soon as it is captured, an expanded ebay multiple would be absorbed. I don’t know if that is accurate, as I haven’t looked at the Shopping.com acquisition. This could be a very telling value metric, especially since enthusiasts, ebabes and edudes, would always be clueless on such metrics.

A audience member mentioned that Shopping.com was sold for 20X ebitda. Dutta did not dispute this, but did mention that you should take $140 cash for true enterprise value. I should look at that, to see what enterprise value is, and also to externally verify that this statement is accurate.

I looked at 10Q and press release for purchase of shopping.com. Looks like ebay paid $620M in cash, of which $140M is being bought, hence net purchase is $480M. At quick look the multiples don’t look that much different than ebay. The size of the transaction is small, hence discussion above really looks more theoretical than practical. In other words, item 5. from this list, seems irrelevant.

Other notes

6. Smith Barney mentioned that classified advertising is a potentially growing area.

7. Smith Barney mentioned the following, “Large cash position — as of March, $3.4B in cash with no material debt; we estimate 2005 FCF of $1.5B, leaving eBay ending 2005 with $4.4B in cash; Relatively high ROIC — We estimate 26% in 2005, up from 23% in 2004”.

8. I read discussion that Google might be developing a new online payment system.

the following grid was expanded from below

	1Q03	2Q03	3Q03	4Q03	1Q04	2Q04	3Q04	4Q04	1Q05

Registered Users (millions)	68.8	75.13	85.5	94.9	104.8	114	125	135.5	147.1
Seq. Growth	11.5%	9.4%	13.5%	11.0%	10.4%	8.8%	9.6%	8.4%	8.5%
YoY Growth	55%	47%	47%	47%	52%	51.4%	46.2%	42.8%	40.4%

Active Users (millions)	31.1	34.1	37.4	41.2	45.1	48.0	51.7	56.1	60.5
Seq. Growth	12.3%	9.6%	9.7%	10.2%	9.5%	6.4%	7.7%	8.51%	7.8%
YoY Growth	50.0%	47.0%	47%	47%	45%	41%	38%	36.17%	34.2%
% of Active Users	45.2%	45.4%	43.7%	43.4%	43.0%	42.1%	41.4%	41.4%	41.1%

March 1, 2005

1. eBay guidance on Long Term Margins from ebay January 2005 investor presentations.

	ebay	PayPal
Gross Margin	85%	45 – 50%
Sales and Marketing	25 – 30%	5 – 6%
Product Development	8 – 10%	5 – 7%
G&A	10 – 15%	15 – 17%
Operating Margin	35 – 40%	20 – 25%

2. ebay listed the following as US competition during January 2005.

a. Onsale, AuctionUniverse, Excite, Up4Sale, Yahoo, Amazon and Microsoft consortium

b. referred to Overstock.com as Understock.com.

3. List of areas where ebay could be aggressive if they wanted to. These are merely notes for me to refer to at a later date. The following could be said for all companies in this industry.

a. Capital expenditures – Theoretically a company could capitalize costs as opposed to recording them as expenses. This would increase total assets, Stockholders’ Equity and Net Income.

b. Allowances for transaction losses.

c. Assumptions used for dilution and/or stock option expense calculations.

4. The following is a quick , back of the envelope analysis. Please do not use this in your analysis. The numbers we used are hypothetical, and this is being put here for future reference purposes only. The following is a what-if example.

Hypothetical Projection scenario for F2011

Revenues	$16 billion
Operating Margin (see table above)	30%
Net Income before tax	$4.8 billion
Tax Rate	36%
Net Income after taxes	$3.0720 Billion
earnings multiple	25
Net value based on earnings multiple	$76.8 Billion
Current Value of eBay ($42.50 * 1,367,720)	$58.1 Billion
Future Value of $3B, 7 years , using 15%	$8B
Future Value of enterprise including current assets	$84.8B

Based on current price of $42.50 have present value of $58.1B, a future value of $76.8B and 7 years. That would be an annualized compound return on investment of 4.07% in 7 years.

Revenues of $16B in 7 years, is a CAGR of 25.46%.

We can take the above a step further. We can use ebay’s current liquidation value of approximately $3B ( a touch overstated), and from that assume an annualized ROI of 15% (keeping in mind that ebay recently had ROE of 12.92%), hence the future value of $3B, in 7 years, at 15%, would be just under $8B.

Hence, you would get the following, Based on current price of $42.50 have present value of $58.1B, a future value of $84.8B and 7 years. That would be an annualized compound return on investment of 5.55% in 7 years.

5. Hypothetical modeling I did. Again, these should not be relied upon, are subject to error, and are means for discussion and review.

Growth Rate	20.00%
Earnings Per Share 2005	0.70
Projected EPS Year 2 2006	0.95
Projected EPS Year 3 2007	1.14
Projected EPS Year 4 2008	1.37
Projected EPS Year 5 2009	1.64

Price	42.500
30 year Bond Rate (AAA)	5.75%
S & P Bond Rate
Sales Per Share	3.03
Price/Sales	14.02
Projected R & D	0.23
Growth Flow Ratio (<12=nrml)	45.70
Cash Flow Per Share	0.72
Capital Expend Per Share	0.21
Net Cash Flow Per Share	0.51
Price/Cash Flow	59.03
Price/ Net Cash Flow	83.33
Cash King (s/b > 10 % )	16.82%

Book Value Per Share	5.43
Intangibles Per Share	1.91
Net Book Value Per Share	3.52
Price/ Net Book Value	12.07
Return on Shr. Equity	12.92%
ROE/PE (current)	21.28%
ROE/PE Year 2	28.88%
Working Capital	1952601
LT Debt	443
Shr. Equity	6090304
LT Debt / Working Capital	0.02%
LT Debt / Shr. Equity	0.01%
Cash	1435910
Current Assets	2929023
Inventory	0
Current Liabilities	976422
Short Term Debt	124273
Quick Assets	2929023
Current Ratio	3.00
Quick Ratio	3.00
Flow Ratio (s/b < 1.25 )	1.75
P/E Ratio Current	60.71
P/E Ratio Year 2	44.74
P/E Ratio Year 3	37.28
P/E Ratio Year 4	31.07
P/E Ratio Year 5	25.89
Inverse P/E Current	1.65%
Inverse P/E Year 2	2.24%
I/P/E to Bond Rate (Current)	28.64%
I/P/E to Bond Rate Year 2	38.87%

PEG Ratio (Current)	3.04
PEG Ratio Year 2	2.24
PEG Ratio Year 3	1.86
PEG Ratio Year 4	1.55
PEG Ratio Year 5	1.29

Graham Ratio (current)	733.06
Graham Ratio Year 2	540.15

Intrinsic Value (current)	25.98
Price / Intrinsic Value (current)	163.59%
Intrinsic Value Year 2	35.26
Price / Intrinsic Value Year 2	120.54%
Intrinsic Value Year 3	42.31
Intrinsic Value Year 4	50.77
Intrinsic Value Year 5	60.92

Company	eBay
Report Date	28-Feb-05
Price	42.5
Growth Rate	20.00%
Price/Sales	14.02
Price/ Net Cash Flow	83.33
Price/ Net Book Value	12.07
P/E Ratio Current	60.71
P/E Ratio Year 2	44.74
Current Ratio	3.00
Quick Ratio	3.00
LT Debt / Shr. Equity	0.01%
LT Debt / Current Assets	0.02%
Return on Shr. Equity	12.92%
PEG Ratio (Current)	3.04
PEG Ratio Year 2	2.24
PEGY Ratio (Current)	3.04
PEGY Ratio Year 2	2.24
Graham Ratio (current)	733.06
Graham Ratio Year 2	540.15
Growth Flow Ratio (<12=nrml)	45.70
Cash King (s/b > 10 % )	16.82%
Flow Ratio (s/b < 1.25 )	1.75
Intrinsic Value (current)	25.98
Intrinsic Value Year 2	35.26
Intrinsic Value Year 3	42.31
Intrinsic Value Year 4	50.77
Intrinsic Value Year 5	60.92
Intrinsic Value / Price (current)	-38.87%
Intrinsic Value / Price Year 2	-17.04%
Intrinsic Value / Price Year 3	-0.45%
Intrinsic Value / Price Year 4	19.46%
Intrinsic Value / Price Year 5	43.35%

February 28, 2005 Notes To 10-K

Fully Diluted Shares outstanding (‘000) as reported by eBay

December 31, 2000	1,121,384
December 31, 2001	1,122,380
December 31, 2002	1,171,280
December 31, 2003	1,313,314
December 31, 2004	1,367,720

Total Stockholders’ Equity as reported by eBay

December 31, 2000	1,013,760
December 31, 2001	1,429,138
December 31, 2002	3,556,473
December 31, 2003	4,896,242
December 31, 2004	6,728,341

3. Weakness of US Dollar (USD) led to an increase of reported revenues by $129.9M.

4. Employee Stock Options – eBay grants options to substantially all employees. Total stock options granted to employees for 2004 and 2003, represented about 3% of total common stock outstanding at 2004 and 2003. eBay expects 2005 to be 2%.

5. Number of employees

Date	Total employees	US Employees
December 31, 2004	8,100	5,900
December 31, 2003	5,700	4,200
December 31, 2002	4,000	3,100
December 31, 2001	2,560	2,560

6. Some Back of the Envelope Cash flow work:

Net cash from operations	1,285,315
less: tax benefit of stock option compensation	(261,683)
less: capex	(292,838)
less: Purchases of intangibles	( 8,646)
less: acquisitions	(1,036,476)
Free cash flow	(314,328)

7. Some Back of the Envelope EPS work:

Fiscal Year	eps as reported	effect on eps if stock options were expensed as compensation as per SFAS 123
1998	$0.01	$0.01
1999	0.01	(0.05)
2000	0.05	(0.09)
2001	0.08	(0.11)
2002	0.22	0.06
2003	0.34	0.19
2004	0.57	0.43
Totals 1998 – 2004	$1.28	$0.44

8. Net Operating Losses from 10-K’s

Fiscal Year	Federal NOL (begins to expire)	State NOL (begins to expire)
2004	$605.8M (2019)	$138.6M (2006)
2003	$502.6M (2019)	$238.8M (2006)
2002	$559.4M (2019)	$133.1M (2006)
2001	$345.1M (2019)	$149.8M (2004)
2000	$274.9M (2019)	$128.0M (2004)
1999	$192.9M (2019)	$ 99.1M (2004)

9. Financial Statement Analysis – Some assorted analysis. Please do not rely on these. There could be errors, or application of certain ratios may not be relevant or could be misleading when investing in eBay.

2005 assumptions (these are subject to error and not necessarily guided by company):

Shares Outstanding (fully diluted)	1,422,000,000
Revenues	4,310,719,000
Net Income (after stock option compensation)	995,400,000 or $0.70 per share
Product Development	7.6% of revenues
Cash Flow per share (reducing for tax benefit of options)	$0.72 per share
Capital expenditures	$0.21 per share
Free Cash Flow per share (F2005e)	$0.51

A. Return on Equity = Net Income X Sales X Assets
Sales Assets Equity

2005e	12.92%
2004	11.57%
2003	9.02%
2002	7.03%
2001	6.03%

B. Earnings Ratio = earnings/price

$0.70 (f2005e)/42.50 (current price) = 1.65%.

C. Current Assets are 268% greater than Current Liabilities

D. Flow Ratio = (Current Assets – Cash and Short Term Investments) s/b < 1.25
Current Liabilities – Short Term Debt

F2004	F2003	F2002	F2001
Current Assets	2,911,149	2,145,882	1,468,458	883,805
Cash	1,330,045	1,381,513	1,109,313	523,969
Short Term Investments	682,004	340,576	89,690	199,450
Current Liabilities	1,084,870	647,276	386,224	180,139
Short Term Debt	124,272	2,840	2,970	16,111

Flow Ratio (desired < 1.25) (see this link for a discussion on Flow ratio)

http://www.fool.com/portfolios/RuleMaker/RuleMakerStep6.htm#5

December 31, 2004	.9360
December 31, 2003	.6576
December 31, 2002	.7031
December 31, 2001	.9778

E. Cash King is a measure of Cash flow. The ratio can be seen at this link http://www.fool.com/portfolios/RuleMaker/RuleMakerStep6.htm#4

Cash King = Free Cash Flow s/b > 10%
Sales

Free Cash flow f2005e $0.51

Revenues/Share f2005e $3.03

Cash King = 16.83%

F. PEG Ratio

This ratio measures P/E over Growth Rate. We generally like to invest when PEGS are < 1.

PEG = PE/Growth Rate

Current Forward P/E = (42.5/.70) = 60.71

Growth Rate (non authoritative estimate) = 25

Hence, PEG = 2.43

This PEG by itself seems to indicate a potentially overvalued situation. Yet, if eBay carried the growth rate of 25% for say 5 years, then one could argue that the PEG could go to less than 1. Yet, share price would need to stay at 42.50 for that to happen. Again, this is merely one of many formulas, which help build an investing and ever changing road map.

January 19, 2005

	1Q03	2Q03	3Q03	4Q03	1Q04	2Q04	3Q04	4Q04	1Q05
Registered Users (millions)	68.8	75.13	85.5	94.9	104.8	114	125	135.5	147.1
Seq. Growth	11.5%	9.4%	13.5%	11.0%	10.4%	8.8%	9.6%	8.4%	8.5%
YoY Growth	55%	47%	47%	47%	52%	51.4%	46.2%	42.8%	40.4%
Active Users (millions)	31.1	34.1	37.4	41.2	45.1	48.0	51.7	56.1	60.5
Seq. Growth	12.3%	9.6%	9.7%	10.2%	9.5%	6.4%	7.7%	8.51%	7.8%
YoY Growth	50.0%	47.0%	47%	47%	45%	41%	38%	36.17%	34.2%
% of Active Users	45.2%	45.4%	43.7%	43.4%	43.0%	42.1%	41.4%	41.4%	41.1%

January 10, 2005

Earnings are expected to be released on January 19th, after the market closes. We are certainly expecting to see stellar earnings and revenue growth. We also expect to see a major benefit to a weak dollar. The benefit of the weak dollar will not be a permanent event. Most eBay investors will not realize this, and of course this could push up the stock, as most investors, just might expect this type of growth to continue, indefinitely.

We see the following as negatives for eBay going into 2005.

a. If the US Dollar stabilizes, the earnings increases from currency gains will be reduced or disappear completely. This will have an affect on prior period comparisons.

b. It is projected that in the periods following June 2005, that stock options will be treated as an expense. This will certainly reduce eBay’s operating profits. If you scroll down to our writings on October 27, 2004, you will see how options expensing would have affected eBay’s prior earnings.

c. Amazon and Yahoo are becoming aggressive in the auction market. Google could also launch meaningful competition. We have other competitors that are becoming more formidable, such as Overstock.com. We recently read that indirect threats could come from substitute service sites. These include sites that allow users to sell products at a fixed price. There are also price comparison sites. One site is Pricegrabber.com, another site is Price.com .

We would not be surprised to see revenues for 4Q04 to exceed $930M. Management has guided at $915M. We also would not be surprised to see gaap eps of $1.17, whereas management guided at $1.14.

We would certainly keep an eye on dilution, cash flow generation from exercising of employee stock options, net operating loss carry-forwards and stock option compensation expense.

As we have frequently mentioned, PayPal is the thorn that could continue to and perhaps permanently hurt our short position.

The following is a table we will start to monitor on a closer basis. These are some user metrics we are working with. We will try to develop this as time goes on.

	1Q03	2Q03	3Q03	4Q03	1Q04	2Q04	3Q04
Registered Users (millions)	68.8	75.13	85.5	94.9	104.8	114	125
Seq. Growth	11.5%	9.4%	13.5%	11.0%	10.4%	8.8%	9.6%
YoY Growth	55%	47%	47%	47%	52%	51.4%	46.2%
Active Users (millions)	31.1	34.1	37.4	41.2	45.1	48.0	51.7
Seq. Growth	12.3%	9.6%	9.7%	10.2%	9.5%	6.4%	7.7%
YoY Growth	50.0%	47.0%	47%	47%	45%	41%	38%
% of Active Users	45.2%	45.4%	43.7%	43.4%	43.0%	42.1%	41.4%

December 9, 2004 Notes from December’s issue of “The High-Tech Strategist” 603 888 3954

1. Hickey alludes to eBay overvaluation with the comparison of market valuations from 1990. He mentions that at the bottom of 1990 bear market, the combined valuations of Microsoft and Intel was about $10B, or a little over combined sales of $6B. eBay is currently selling at around 24.6X F2004 estimated sales of $3,253B. Look below at our posting on November 19, 2004, where we make other comparisons. Hickey shows us that eBay is currently selling for 8X the 1990 bear market bottoms of Microsoft and Intel combined. He then discusses that the future demand of Microsoft and Intel from 1990 was of high growth. PC penetration was much lighter in 1990 than it is today. Yet, Hickey discusses that he feels the world and US internet penetration is approaching saturation. He claims there are 788M world internet users. Hickey sites an article by Network World magazine written about a week ago, where the outgoing Chair of the Internet Engineering Task Force, Harald Alvestrand, made this claim. Hickey sites Alvestrand as saying that the internet revolution is over, and now the “newness” of the internet is now just part of the infrastructure.

2. Hickey mentions that domestic auctions have started to fall when comparing year over year quarters. This is something I will try to track and chart in the future.

3. He mentions that growth now is reliant on international markets. He sites that competition and barriers to entry are steeper abroad. He sites China closing down unlicensed internet cafe’s, as well as the China Government 10 block of Google. I respect Hickey a great deal, yet I will play devils advocate on this item. I think that eBay has executed the business model flawlessly, both nationally and internationally. I will monitor the international revenues, while at the same time being cognizant of the currency issues. In time we will see if international growth becomes problematic. It is of my opinion that the valuation of the company has already priced for severe excellence, and anything below that could become a catalyst for the stock price to deflate.

4. Hickey sites an interesting eBay risk as the slowdown of revenue growth via a possible 2005 consumer recession. As we have mentioned many times on this site, we believe that the US consumer will start focusing on savings and retrench from the drunken consumer purchasing binge. Hickey feels that a recession will hurt eBay’s revenue growth, because of their reliance on non-essential items. Hickey suggests to look at the major categories on the home page, and from there determine essentials versus non-essentials.

5. Hickey sites hysteria in listings such as a half eaten 10 year old sandwich that supposedly has an image of the Virgin Mary on it. He mentions that other auctioneer’s are placing other frivolous items on the site, and in turn this creates higher auction counts. Heck, I have a friend who put on eBay a ” lump of coal”. Amazingly enough, it looks like there is a current bidder for this joke.

December 7, 2004

1. Merrill raises 4Q04 revenue to $951M (+47% yoy) and eps to $0.35 (+ 44% yoy). F2004 ests. are Revenues of $3.29B and eps of $1.23. F2005 estimates are now $4.35B in revenues and $1.60 in eps. Merrill did not change their expected share count of 684.1M in F2004 and 721.7M in F2005. Fully diluted weighted shares outstanding as of September 30, 2004 was 685M, yet the nine month average was 680M. Merrill made the following changes in assumptions as well ( only selected a few of the changes for presentation below).

a. F2004 gross margin goes up to 81.6% from 81.5%.

b. F2004 operating margin goes up to 35.7% from 35.5%.

c. F2004 net margin goes up to 25.7% from 25.5%.

d. Cash and equivalents increase to $2,262.3 from $2,257.0.

2. Merrill mentions that on a previous conference call, CFO stated that a quick rule of thumb for Euro/USdollar would be that every five points in exchange rate above company guidance, would translate into about $18M in foreign exchange benefits. Merrill mentions that management guided $1.20 /Euro, currently exchange rate is > $1.34/Euro. Hence this could add $14 – 21M of revenue.

3. Merrill estimates that for every 10M in additional listings forecast, results in about 230M in GMV. Mentions that historical monetization rate would translate this to additional revenue of $20M. Merrill expects GMV for 4Q04 to be $9,851.4M and for F2004 $34,209.4.

November 19, 2004

1. Sales for F2004e are expected at $3,253.3
Sales for F2005e are expected at $4,299.2

This is a growth rate of 32.15%. If you extrapolate various growth rates, based on F2004e revenues, you get the following:

25% CAGR, 10 years, PV of $3,253.3 you get FV of F2014 of $30,296M.

15% CAGR, 10 years, PV of $3,253.3 you get FV of F2014 of $13,164M.

It is interesting to see, that eBay’s current market cap is still selling at a price to F2014 Revenues of 2.54X when using a 25% CAGR, and at 5.85X when using a 15% revenue CAGR.

2. The current market cap. of eBay at $110 per share and a share count of 700M shares (current is 680,415) is $77B.

Grid of selected companies

Company	current price	market cap	est revenues(m)	est eps	Price/Revenues	Price/earnings
eBay	$110	$77.00B	$3,253.3e	$1.21	23.67	90.91
GM	$39.88	$22.50B	$156,760e	$5.35 (05e)	00.14	7.45
QCOM	$41.28	$65.53B	$5,704 e (05)	$1.15 (05e)	11.49	35.90
AMZN	$39.00	$16.93B	$6,832	$0.96	2.48	40.63
Alcoa	$33.74	$29.34B	$23,938	1.64	1.23	20.57
Sears	$53.00	$10.60B	$36,400	1.55	0.29	34.19
NY Times	$41.27	$ 6.04B	$3,300	1.95	1.83	21.16

You see that eBay carries a market cap of $77Billion. That is greater than the total market caps of all of the following companies combined. GM + Alcoa + Sears + NY Times . The market cap of these 4 companies is only 68.48B. Hence, even if eBay dropped to 97.83, the value would still be greater than the companies I mentioned. The total annual revenues for the companies I mentioned are $220Billion for 2004. As you can see, if we extrapolate eBay’s revenues by 25% growth rate, every year for 10 years, they would end up with $30B of revenues, in 10 years. Keep in mind that eBay’s profit margin is much greater than the 4 companies I mentioned in this paragraph.

November 16, 2004

1. eBay bullishness is rampant. Yet, one could have said that about MSFT in 1985.

2. Insider selling has been huge. everyday reports of filings. Director has sold 250,000 shares in the last day for cash generation of over $27 million. Since October 1, 2004, insiders have sold 6,869,432 shares. If you use a price of $100 per share (which is arbitrary, as I haven’t analyzed the prices), the total sales are $687M, or almost 1% of the entire current market capitalization.

3. Of all the reports I read, I have never seen a sell side report mention the fact that eBay collects billions of dollars from her very own employees. This year alone the collections have been over $420M. It will be interesting to see what 4Q04 brings, since the selling this quarter has been massive.

4. PayPal can be the wild card. PayPal could make eBay grow into her valuation. I guess I see it as a potential international financial services company.

5. It is my understanding that PayPal did have an outage for about an hour the other day. PayPal was also disrupted between October 8 – 13th, 2004.

November 15, 2004

eBay recently presented at a Morgan Stanley Conference. The following are some notes of Meg Whitman’s discussion.

1. PayPal is helping reduce cross currency friction.

2. collectibles and autos still have large growth potential. Collectibles are still < 5% Gross Merchandise Volume (GMV) for USA, and autos are < 1%.

3. PayPal was indicated to be called “PayPal off-eBay” for C2005. Called 2004 a year of international rollouts.

4. Expects China to be on track to do GMV of $340M in annualized GMV.

October 27, 2004

10Q was released this evening. I will examine over the next few weeks. Here is a quick thought.

1. fully diluted eps as reported for 3 months ended Sept 30, 2004 was $0.27, had stock options been included as an expense, fully diluted eps would have been $0.15. That is a reduction of over 44%.

2. fully diluted eps as reported for 9 months ended Sept 30, 2004 was $0.84, had stock options been included as an expense, fully diluted eps would have been $0.67. That is a reduction of 20%. I could be wrong on this, but I think the severity of the difference in 3Q04 was because of the material rise in stock price. I really need to study this, as I could be very wrong on that.

3. For the 9 months ended September 30, 2004 employees have paid eBay corporation $429,242,000 for buying their stock options. For any business owners out there, could you tell us the following: ” How much money has your employees paid you for the first 9 months of the year ?”

eBay also recognized a tax benefit of stock option expense of $184,455,000 for the first 9 months of the year.

4. eBay’s fully diluted shares outstanding increased by 22,746,000 over the last 12 months. When you apply that to today’s price of $98, you get increased market cap of $2.2 billion. eBay has not bought back any stock to curb this dilution.

5. Comprehensive Net income for the 3 months ended September 30, 2004 was $194,882,000. Foreign Currency gains were $9,310,000. One could interpret that 5% of net income was caused by foreign currency gains.

6. eBay’s cash and short term investments has been decreasing this year to date. This is not a bad thing, I am merely pointing it out. Here is a quick calculation.

Net cash from operations	904,108
less: tax benefit of stock option compensation	(184,455)
less: capex	(209,950)
less: Purchases of intangibles	( 7,257)
less: acquisitions	(703,706)

Free cash flow	(201,260)

Please keep in mind that it is late when I am writing this, and any error in theory or math is inadvertent. Again, acquisition strategy is to create future cash flows, hence I am hardly dissing their operations. Plus, don’t forget that eBay generated almost a half billion dollars from sale of stock to her own employees. ( I am embarrassed to say that we actually pay our employees. how archaic of us 😉

7. don’t forget that eBay has over $1.6B of tax loss carry-forwards. hence they can make a great deal of money some day , and not pay corporate income taxes. Ask yourself this question: ” Is this correct? Does eBay actually lose money for federal tax purposes.” Yes, it is correct.

8. Book Value is $8.89 per share.
9. Tangible book value is $5.06 per share
10. Included in book value is a deferred tax asset. It is tough to determine that amount, but I estimate it to be $0.25 per share. Could be more, probably not less. Might have to wait for year end on that one.
comments on insider selling reported last night :

I found it interesting that the insider selling came out simultaneously with the 10Q. I do not know the reasoning behind these sales, as I haven’t studied it yet. In theory, and I am not saying in this case, it would be interesting to see a company have material insider selling, coinciding with the release of the 10Q. What if the seller had information, that would be available in the Q in a date that came after the insider sale? Imagine if that happened and there was info in the Q that would cause an investor to question the quality of earnings and cash flow. For example if a company recorded $1.00 in earnings via their earnings release and cc, but then when the Q came out, investors saw that eps would be $0.57 if stock options were treated as an expense. Again, I am not saying that is what happened here. I need to fully review the filings. I sense these sales may have been option related.
Here you see a sale by CFO. You can see it is option related, hence the conspiracy theory mentioned above, on the face, does not look terribly unusual. One would want to check prior history of CFO and other sales, to see if pattern has been similar for long periods.

SOURCE: Form 4

ISSUER: EBAY INC
SYMBOL: EBAY

FILER: DUTTA RAJIV
TITLE: CF

DATE TRANSACTION SHARES PRICE VALUE
10/26/04 Exercise 30,000 $20.03 $600,939
10/26/04 Sale 30,000 $95.57 $2,867,214

OWNERSHIP: 20,863 (Direct)
Interesting that CFO currently owns $2,000,000 of stock. Probably not a huge portion of his net worth.
reminder of the tax loss carry-forward from 10K

“As of December 31, 2003, our federal and state net operating loss carryforwards for income tax purposes were approximately $502.6 million and $238.8 million, respectively. If not utilized, the federal net operating loss carryforwards will begin to expire in 2019, and the state net operating loss carryforwards will begin to expire in 2006. The Company’s federal and state research tax credit carryforwards for income tax purposes are approximately $20.2 million and $17.4 million, respectively. If not utilized, the federal tax credit carryforwards will begin to expire in 2021. Deferred tax assets of approximately $151.6 million at December 31, 2003 pertain primarily to certain net operating loss carryforwards resulting from the exercise….”

July 15, 2004 Fred Hickey on eBay in July 2004 Issue

I have been a long time subscriber to Fred Hickey’s, “The High-Tech Strategist”. Contrary to popular belief, Mr. Hickey is not a “permabear”. He merely feels that valuations are not in sync with current company and market conditions. You can order a subscription to “The High-Tech Strategist” by calling 603-888-3954. Currently subscriptions are $120 annually. We are not at all affiliated with the newsletter.

This month, Mr. Hickey discussed eBay briefly. Mr. Hickey feels that eBay’s growth will slow if consumer spending starts to slow. He feels that investors will come to the understanding that ” a lot of the buying and selling on eBay is of non-essential items.” He claims that eBay estimates that there are 430,000 people making all or most of their living on eBay. Mr. Hickey feels that much of the sales are the sale of overpriced junk from one person to another at a marked-up price.

June 11, 2004 Notes to eBay presentation at Deutsche Bank Media Conference

Rajiv Dutta, CFO

1. 105M users at the end of 1Q04. 45M active users at end of 1Q04. Listed 328M items during 1Q04.

2. Gross Merchandise Sales (GMS) is called the most important metric. $8B in 1Q04 , which is a $32B annual run-rate.

3. Total PayPal payment accounts are at 45M. They claim that is an 85% three year compounded growth rate. $4.3B flowed through those accounts in 1Q04.

4. eBay had $756M in 1Q04 revenues. Claims that is a 124% six-year compounded growth rate.

5. With 105M users, eBay would be the 11th most populated nation in the world.

6. Claims buyers tend to be value oriented. Oriented towards middle America.

7. Calls eBay a $1.9 trillion opportunity, and that is based on “some analysis done way back in 2001 -2002 time frame. This got a little confusing, but Mr. Dutta claims that new services and such would add $1.5 trillion to that number, then add PayPal. Further in the discussion he says, ” So, in order for us to make headway against this $3 trillion opportunity”.

8. ” This has actually been quite remarkable in terms of the velocity of this business, just the U.S. business. This is a young business, make no mistake about it, but in just a few short years, we have become, in terms of volume, ranking right up there with some of the largest retailers in the United States. In fact, we just overtook the Gap last year.”

9. ” PayPal takes a transaction revenue on — an average transaction is about — a fee is about 3.6 percent on all the money that transfers through PayPal. We are up to 4.3 billion that went through in Q1. PayPal in fact collects about 3.6 percent. Now, of that, the transaction expense rate, which is about 1.25 percent, is actually influenced by what is the mix of those transactions? Are they credit cards? Are they bank accounts, or are they inter-account transfers within PayPal? What you will very quickly (indiscernible) of course is that while PayPal a merchant services fee on the credit card portion of the transaction, the bank accounts are very modest fees because of ACH transfers and of course, a PayPal-to-PayPal account transfer is actually — there’s really no transaction expense to eBay.

On that, you have to then apply the transaction loss rate. There is a certain percentage of these transactions where there is a loss associated with it. That number has come down from around the 40 to 50 basis point range to most recently about 27 basis points, which then gives you the payment margin — this is not (inaudible) the payment (inaudible) gross margins that we report on the side of about 58 percent — very, very healthy business and a very strong business model.”

10. Claims that capital requirements are very low.

11. Capital expenditures as percentage of sales are in single digits and heading down.

12. ” here’s another thing — when you look at eBay’s P&L, you’re looking at eBay’s cash flow statements, because when we talk about investments, we’re not talking about capital; we’re talking about spending that shows up in the current period in eBay’s P&L. That is actually pretty important point when you are comparing eBay to many other businesses. The investments in the business don’t show up in the balance sheet, which often remains a mystery to a lot of people, but actually shows up directly on the P&L statement.”

13. Looking for future margin expansion in the long term future. Currently the focus is on top line growth and strategic investments. ” What we’ve really decided is the right thing to do is to ensure that the leverage is on the top line and to ensure that we’re not mortgaging the revenue growth of this business over a sustained period of time and on the bottom line, continue to show improvement.”

14. “We’re going to be making significant investments in our businesses around the world”

15. Reaffirmed guidance of $3.15B in F2004 and operating margin of 34%. PayPal long term operating margin is targeted at 20 to 25%, as contrasted to eBay’s 35 – 40%.

16. ASP has been increasing.

17. Now has 150,000 stores on a global basis.

18. Claims China will be a large market. ” Their gross merchandise sales is on a run-rate of about $200 million. I mean, this is getting to be a pretty good business pretty quickly.”

June 11, 2004 Some tables we worked on

Consensus Revenue estimates are as follows:

Year	Q1	Q2	Q3	Q4	Fiscal Year
2003	476.49a	509.27a	530.94a	648.39a	2165.09a
2004	756.24a	770.71e	779.18e	907.88e	3214.01e
2005	994.60e	1013.10e	1025.90e	1173.65e	4207.25e

Consensus earnings per share (eps) are as follows:

Year	Q1	Q2	Q3	Q4	Fiscal Year
2003	0.16a	0.14a	0.16a	0.21a	0.67a
2004	0.30a	0.27e	0.27e	0.33e	1.17e
2005	0.38e	0.38e	0.38e	0.45e	1.59e

The above are merely consensus estimates as of June 11, 2004. We have recently seen sell side firms projecting eps at $1.58 to $1.61 for F2005, and revenue estimates of $4254.8 to 4258.4 for F2005.

We have been reading a JP Morgan report dated June 7, 2004. Here are some notes we took while reading the report.

a. believes that eBay has 14% user penetration in U.S.

b. expects better than expected improvement on average selling price (ASP) on eBay to increase 5% by end of F2005.

c. expects margins to improve.

d. expects strong international business, with both eBay and PayPal.

e. expects strong growth in U.S. market. expects U.S. online revenue growth of 38% in F2004 and 37% in F2005.

f. long term eps growth is targeted at 40% and F2005 est is $1.61.

g. feels company has pricing power, feels growth will not slow and that growth in broadband market will fuel growth.

h. Initiates coverage with an Overweight position.

June 10, 2004

The following are some “back of the envelope analysis” on various potential eBay valuations. We were trying to work through a valuation scenario, whereas one can project revenues and net income for a period in the future. We used an arbitrarily assigned year of 2010. In doing this task we used various projections going forward till 2010. Of course such projections on a company that is as new and as dynamic as eBay, has its inherent faults. One fault could be the materially incorrect use of revenue and net income projections. Nevertheless, these are all hypothetical assumptions. For us they are a roadmap until future data comes along.

1. We think that one can assign a discounted multiple of say 3X – 5X of mature gross revenues. Currently eBay is trading at multiples of approximately 26X F2003 trailing revenues. The question is, what do you expect mature revenues to be? If you felt for example that revenues would be $20B in F2010, you could assign a market cap of $100B in 2010, using 5X revenues (7 years from now). Keep in mind that $20B as future revenues would be an annualized revenue increase of 37.38% for each of the next 7 years.

2. The following are some hypothetical assumptions and calculations:

a. Gross Revenues for F2010 $20.0B

b. Net income, we will use 26% of projected F2010 Revenues. This computes to net income of $5.2B. Keep in mind that this net income figure, does not include the expensing of stock options. We believe that the current FASB proposal on including stock option compensation expense in earnings calculations, will become a certainty in financial reporting. For this exercise, we have ignored stock option expense. Again, keep in mind that if stock option compensation were treated as an expense, net income would be materially reduced. The following is a table which compares “as reported eps” to “effect on eps if options were expensed as compensation”. We took this information from the F2003 10-K and the F2000 10-K. The table below has been adjusted for stock splits.

Fiscal Year	eps as reported	effect on eps if stock options were expensed as compensation as per SFAS 123
1998	$0.02	$0.02
1999	0.02	(0.09)
2000	0.09	(0.18)
2001	0.16	(0.22)
2002	0.43	0.11
2003	0.67	0.37
Totals 1998 – 2003	$1.39	$0.01

c. For market cap on revenue multiple for F2010, you would get $20B X 5 (multiplier assigned above) = $100B.

d. For market cap on earnings multiple, lets assign mature p/e of 25. You would get a market cap of $130B, using the $5.2B in eps.

e. Again, for argument sake, let’s use market cap of $130b, which is using the eps multiplier and not the revenue multiplier.

f. We now have to project fully diluted shares.

If you count the current shares of 673,798,000 and compound them by 4% each year for 7 years, you get a share count of 886,672,000 shares. We think that 4% annualized future dilution is very conservative, but let’s go with it.

If we take market cap of $130B / projected shares outstanding of 886,672,000 you get future share price in year 7 of $146.62. If you put $146.42 as Future Value in your calculator, 7 years as the term, current share price of $87 as present value, the compounded calculated rate of return would be 7.74%. Sure seems like a lot of optimistic reasoning has to occur to be willing to take such risks for an optimistic expected return of 7.74%.

Let’s change around the assumptions a bit for a different look at eBay’s valuation. Here are different assumptions for F2010.

a. Gross revenues stay at $20B, yet revenue multiplier gets reduced to 4X

b. eps gets reduced to 20% of Gross Revenues fro F2010, making net income $4B. Notice from the table below that Net Income has never exceeded 20.60%.

Net Profit Margin as reported by eBay

Fiscal Year	Net Income as percentage of Revenues
1999	4.82%
2000	11.19%
2001	12.08%
2002	20.58%
2003	20.40%

c. fully diluted shares increase by 5%, they become 948,101,000.

Fully Diluted Shares outstanding (‘000) as reported by eBay

December 31, 2001	561,190
December 31, 2002	585,640
December 31, 2003	656,657
March 31, 2004	673,798

d. reduce p/e to 20 from 25.

Hence, based on revenue multiplier of 4X, you get $80B market cap. Based on p/e of 20, you get the same $80B market cap.

Divide $80bil by 948,101m shares, you get market price in F2010 of $84.38.

If you put $84.38 as Future Value in your calculator, 7 years as the term, current share price of $87 as present value, the compounded calculated rate of return would be (0.44%). Keep in mind that the future value is less than the current stock price.

Again, the above calculations were performed with the intent of accuracy. If you find errors in our calculations, please contact us. These calculations are “back of the envelope” and are put here for discussion purposes only.

Please refer to the disclaimer at the bottom of this page.

June 7, 2004 How does eBay generate cash flows? Is cash flow primarily generated from their very own employees?

The following is a table we constructed. Notice how eBay has generated free cash flow of $310,351,000 since inception. Also notice that the cash generated from receiving cash from their employees was $1,140,344,000. This is an interesting scenario. One could interpret that eBay is collecting more money from their very own employees, than they are from the cash generated in operating their business.

eBay is collecting more money from their very own employees than they are from their operating business. This is ongoing, and why wouldn’t it be included in trying to determine a truer picture of where cash is coming from. This is not occasional financing and such. We have not included any dilution effects. Keep in mind that eBay has not bought back any treasury stock since inception.

($’000)	1998	1999	2000	2001	2002	2003	1998 – 2003
Cash flow from Operations	6,041	62,852	100,148	252,112	479,903	874,119	1,775,175
Subtract:
Tax Benefits	0	11,104	37,483	81,705	91,237	130,638	352,167
Capital Expends.	12,758	86,907	49,753	57,420	138,670	365,384	710,892
Acquisitions	1,248	7,159	5,850	111,730	59,411	216,367	401,765
Free Cash Flow	7,965	42,318	7,062	1,257	190,585	161,730	310,351

Annual eBay Stock Option Proceeds

Fiscal Year	($’000)
1999	18,106
2000	45,530
2001	123,710
2002	252,181
2003	700,817
Total	1,140,344

As you can see from the above, we have been trying to determine if eBay makes most of her money from operations or from receiving cash when their very own employees, when they exercise their options. Through our search so far, we have only found that eBay seems to be making most of their money on employee options being exercised. We are open to the possibility and even likelihood that our analysis might be flawed. We write that because, we have seen no sell side analysts having discussed this. We find that odd. This omission leads us to think that we have made a material error in our analysis. We have read Albert Meyer, of www.2ndopinionresearch.com discuss this at length. Of course, they are not sell side analysts. We still need to reread and reinterpret Albert Meyers work. Yet, we think that we are both saying very much the same thing. His work on employee options has been extensive, whereas ours is still in the infancy stage.

This is real difficult for a common investor to understand. Here is an easy analogy on how the exercising of options generates cash flow for eBay. We have not even included the cash benefit that the US Government gives eBay in the form of tax deductions on the payroll taxes accompanying this. As I write this, I think of once again, how interesting it is that the IRS calls options exercising payroll, whereas GAAP does not.

Here is a scenario to help you understand.

1. You are a boss. You pay your employees money for them to work for you. That is an expense. Of course this expense reduces net income (eps).

2. eBay does the above, no problem. We have no idea if they are paying market wages, or below market because of employee stock option enticement.

3. Let’s expand on item 1. Not only does an employee receive cash wages, but the employee often will also have the right, for example to buy 20,000 shares from eBay at say $20. Employee, then can sell shares to open market via Waterhouse, Ameritrade, etc for $88 per share.

Interesting what happens here. Employee hands over to eBay $400,000 to get their stock that they just bought from eBay (at a price well below market). Employee is cool with that because they turnaround and can immediately sell what they just paid $400,000 for $1,600,000.

Do you see what might be happening here? Is eBay getting paid to have employees? Would you as a boss, like to have your very own employees pay you to work for you?

eBay via a proxy filing is asking for a greater amount of option shares. Is the cash generation the reason eBay wants more employee options in Proxy? Here are some cut and pastes of that proxy filing. The cut and pastes are not pasted in their entirety. Please refer to the actual DEF 14A which was filed with the SEC on May 17, 2004.

1999 Global Equity Incentive Plan

To approve amendments to our 1999 Global Equity Incentive Plan, including an amendment to increase by 6,000,000 the number of shares of common stock that may be issued under our 1999 Plan.

GENERAL

The 1999 Plan provides for the grant of stock options, stock bonuses, and restricted stock purchase awards, which we refer to collectively as awards. Options granted under the 1999 Plan are not intended to qualify as incentive stock options under the Internal Revenue Code.

PURPOSE

The purpose of the 1999 Plan is to provide a means by which employees and consultants in countries other than the United States may be given an opportunity to purchase our common stock. We believe that the 1999 Plan assists us in retaining the services of such persons, in securing and retaining the services of persons capable of filling such positions and in providing incentives for such persons to exert maximum efforts for our success. We may also choose to grant awards under the 1999 Plan to employees and consultants in the United States.

STOCK SUBJECT TO THE 1999 PLAN

Assuming adoption of this Proposal 2, we have reserved an aggregate of 26,000,000 shares of our common stock for issuance under the 1999 Plan. As of April 30, 2004, there were 8,275,335 shares to be issued upon the exercise of outstanding options under the 1999 Plan and only 8,595,832 shares were available for future grant under the 1999 Plan from the 20,000,000 shares previously approved by our stockholders. If options granted under the 1999 Plan expire or otherwise terminate without being exercised, the shares of our stock not acquired pursuant to such options again become available for issuance under the 1999 Plan. As of April 30, 2004, the closing price of our common stock as reported on the Nasdaq Stock Market was $80.03 per share.

PARTICIPATION IN THE 1999 PLAN

The grant of stock options under the 1999 Plan to executive officers, including the executive officers named in the Summary Compensation Table set forth under “Executive Compensation — Summary of Compensation,” is subject to the discretion of the Board. During 2003, no options were granted to executive officers or directors, and options to purchase 3,871,664 shares at a weighted average exercise price of $48.40 were granted to other employees under the 1999 Plan. During this period, options under the 1999 Plan to purchase an aggregate of 301,929 shares were cancelled. Since the 1999 Plan’s inception, none of our current directors have been granted options to purchase shares under the 1999 Plan. As of December 31, 2003, the weighted average exercise price of outstanding options under the 1999 Plan was $39.15. As of the date hereof, there has been no determination as to future awards under the 1999 Plan. Accordingly, future benefits or amounts received are not determinable.

AMENDMENT TO 2001 EQUITY INCENTIVE PLAN

3. To approve an amendment to our 2001 Equity Incentive Plan to increase by 18,000,000 the number of shares of common stock that may be issued under our 2001 Plan.

GENERAL

The 2001 Plan provides for the grant of incentive stock options and nonstatutory stock options. Incentive stock options granted under the 2001 Plan are intended to qualify as “incentive stock options” within the meaning of Section 422 of the Code. Nonstatutory stock options granted under the 2001 Plan are not intended to qualify as incentive stock options under the Code. We have not granted any incentive stock options since our initial public offering.

PURPOSE

The purpose of the 2001 Plan is to provide a means by which eligible employees, directors and consultants of eBay and its affiliates may be given an opportunity to purchase our common stock. We believe that the 2001 Plan assists us in retaining the services of such persons, in securing and retaining the services of persons capable of filling such positions and in providing incentives for such persons to exert maximum efforts for our success.

STOCK SUBJECT TO THE 2001 PLAN

Assuming adoption of this Proposal 3, we have reserved an aggregate of 96,000,000 shares of our common stock for issuance under the 2001 Plan. As of April 30, 2004, there were 49,826,806 shares to be issued upon the exercise of outstanding options under the 2001 Plan and only 16,969,618 shares were available for future grant under the 2001 Plan from the 78,000,000 shares previously approved by our stockholders. If options granted under the 2001 Plan expire or otherwise terminate without being exercised, the shares of our common stock not acquired pursuant to such options again become available for issuance under the 2001 Plan. As of April 30, 2004, the closing price of our common stock as reported on the Nasdaq Stock Market was $80.03 per share

PARTICIPATION IN THE 2001 PLAN

The grant of stock options under the 2001 Plan to executive officers, including the executive officers named in the Summary Compensation Table set forth under “Executive Compensation — Summary of Compensation,” is subject to the discretion of the Board. During 2003, all current executive officers as a group, including the Named Executive Officers, and all other employees as a group were granted options under the 2001 Plan to purchase 3,210,000 shares at a weighted average exercise price of $40.58 and 19,468,954 shares at a weighted average exercise price of $45.35, respectively. During this period, options to purchase an aggregate of 3,243,850 shares under the 2001 Plan were cancelled. Since the 2001 Plan’s inception, none of our current directors, with the exception of Ms. Whitman, has been granted options to purchase shares under the 2001 Plan. As of December 31, 2003, the weighted average exercise price of outstanding options under the 2001 Plan was $37.53. As of the date hereof, there has been no determination as to future awards under the 2001 Plan. Accordingly, future benefits or amounts received are not determinable.

This is interesting stuff. We look forward to our continued research.

June 4, 2004 Items we need to further review

The following is a list of items I need to look at closely.

A. Ratio analysis. Focus on all ratios. Look closely at ROE and intangibles. Look for potential aggressive areas, such as Goodwill and allowances. Try to extend this analysis to all reporting quarters, by looking at 10-Q’s.

B. Review Stockholder’s Equity section for “Unearned Compensation”.

C. Review loans to officer’s policies. A number of them exist as described in SEC filings.

D. Review SEC filings for “Share Based Payments”. How does this affect if at all earnings per share and cash flow.

E. Keep in mind during analysis that company has projected F2004 capex to be $250M, whereas $70M was paid so far in 1Q04.

June 2, 2004 Discussion on eBay listings strength

We have been reading that listings have been strong, and perhaps 3% greater than last quarter. That may be a reason for the run up in the stock over the last two weeks. Half.com stores are now migrated over to eBay. We have read that there are now lower store prices, hence the listing size increase may be larger than the future comparable QoQ revenue increase. It is our understanding that eBay ran a promotional free store listing campaign last week, and that also could account for the increased listings. We expect to see some sell side “upgrades” over the next week or so. Most targets have been hit, and we imagine that those targets are under review.

May 31, 2004 eBay generating cash from their own employees?

I need to verify the following paragraph. I think that the average and typical eBay employee is getting benefits of options. I think I read, and I could be wrong on this entire paragraph, that the typical employee received around $109k in benefits over the years. Think about it, in F2003 alone, eBay corporation brought in over $700 million dollars from their very own employees. I figure that the employees were cool with that, since they probably cashed out to the secondary market (NASDAQ) for about $1.5 to 2.0 Billion.

2. eBay as far as I can see is making a ton more money from employees paying them for the shares( can anyone direct me to where I can get paid by my employees, please let all applicants know that we will pay for coffee (as long as it is reasonably priced)) than they are via there yard sale business. nothing wrong with a global yard sale business. I just gather that most eBay investors think that the cash in the balance sheet is being generated operationally and not via employees kicking in their dollars.

3. Investors don’t mind, since they are raking up huge annual returns. at some point investors might get concerned that they weren’t fully presented with the big picture, plus all the dilution that has been caused. I suspect dilution will grow the next reporting quarter because of the huge increase in stock price and possibly much more stock being cashed in with such a generous price.

4. I even read today, where eBay can generate greater eps, buy paying their employees less and hence compensation would go down. they would be able to do this by being “less stingy” with their options. Of course, the writer was being sarcastic, but his point is , who cares, since this thing is so out of hand anyway.

I want to add that I don’t think this is an eps issue, nor a quality of earnings issue. I think it is merely a cash flow issue. The major issues for shareholders in my mind are the following:

1. are shareholders familiar that much of the cash on eBay’s balance sheet is from employees paying eBay for their options (say $20 per share) and then immediately turning around to the secondary market( NASDAQ) and selling for $80+ per share. Do shareholders think that the cash hoard is from operations or from employees? Again, I would love to have a company where my employees paid me, instead of the traditional visa versa.

2. FASB has come out with exposure drafts which will change the expensing a bit. It will bring the expensing to the body of the financials instead of the footnotes in proforma form. This will certainly reduce reported eps.

3. FASB at the same time will be taking tax benefits of stock option compensation out of operating cash flows. Hence, operating cash flow per share will reduce within the body of Statement of Cash Flows.

4. Dilution is growing at a 5 to 10% annual rate for eBay. On the high side that is additional market capitalization of $6 billion.

I am scouring the SEC filings and will have more to write as time goes on.

May 30, 2004 Some analysis

From the F2003 10-k we see the following regarding Federal Net Operating Losses Carry forwards.

NOL’s are as follows

12/31/03***502.6
12/31/02***559.4
12/31/01***345.1
12/31/00***274.9

earnings per share in the same periods were:

12/31/03***0.67
12/31/02***0.43
12/31/01***0.17
12/31/00***0.17

It appears that most of the Federal Net Operating Losses Carryforwards is being caused by stock options expensing and such. It is just real interesting that during the past 4 years, eBay has accumulated Gaap earnings per share of 1.46 per share, while at the same time, eBay has generated tax losses of of at least $227m.

May 29, 2004

The following is some quick and sloppy work. I posted this on May 27th and May 28th and made a material error in the cash flows for 1Q04. It has been corrected below.

I have been looking at statement on cash flows. For fiscal 2003, I worked with the following:

Net Cash Provided by operating activities***874,119

I then subtract the following for quality of earnings and regular items:

Stock Based Compensation***5,492
tax benefit of options***130,638
capex***365,384
proceeds from stock issuance***700,817

When you total that you get cash used of (317,228)

************************************************************
When looking at 1Q04 we get:

Net Cash Provided by operating activities***366,245

I then subtract the following for quality of earnings and other cash flows, including receipts of monies from employees:

Stock Based Compensation***556
tax benefit of options***76,640
capex***70,912
proceeds from employees for stock issuance***173,089

When you total that you get cash provided of 45,048

********************************************************************
Ebay seems to be receiving more cash from employees exercising options, than it does from its operations.

I don’t see where EBAY has bought back any stock. Hence, dilution and cash flow grows.

Interesting, if we multiply projected shares outstanding of 700,000 * 87.42 share price (and growing), you get market cap of $61bil. This is 19X projected F2004 revenues using $3,209b est and 14X projected F2005 revenues if using $4,252b.

1. eBay generated $700,817,000 in F2003, just by employees paying Ebay for stock, and then the employees would generally go to the open market and sell to the likes of this stock to you and me for say $3,500,000,000 ( i am assuming that I have that correct, I could be real wrong). Hence , part of what I was thinking is what it really sounds like it is a “return of compensation”, almost like eBay is getting paid to have these employees.

2. I am assuming that cash compensation to eBay employees is lower than normal, which increases eps, because the employee is rewarded heavily with stock options. Heck, if I worked at Ebay and felt I was worth a compensation package of say $100k. I wouldn’t care if I was paid say $5k in cash, as long as I ultimately received another $95k in gains on options. I could be wrong, but I sense that the employees are currently getting a lot more than my example.

The following are links to two interesting articles on eBay and some of their accounting situation.

www.accounting.smartpros.com/x38189.xml “Ebay’s Stock Options: How to Transfer Wealth From Investors to Employees”

www.accounting.smartpros.com/x38271.xml “Ebay’s Unannounced Restatement of Earnings”

It seems like eBay is making most of her dollars from employee exercises and Uncle Sam as opposed to her operations. Yet, she is also investing in her infrastructure which could just produce mounds of cash in the future. Hence this is not a clear cut or easy answer.

Disclaimer

If you are a client of ours, and if you have questions regarding eBay, please call our office. If you are not a client of Redfield, Blonsky & Co. LLC Investment Management Division and are reading these notes, we urge you to do your own research. We will not be responsible for any person making an investment decision based on these notes. these notes are a “by-product” of our research. We are not responsible for the accuracy of these notes. We are not responsible for errors that may occur in these notes. Please do not rely on us to monitor or update this or any other report we may issue. In theory, we could come across some type of data or idea, which causes us to eliminate our short position of eBay from our portfolios. We will not notify readers revisions to these notes. We are not responsible to keep readers of these notes updated for changes or material errors or for any reason whatsoever. We manage portfolios for clients, and those clients are our greatest concern as it relates to investing. Certain clients of Redfield, Blonsky & Co LLC may not have eBay in their portfolios. There could be various reasons for this. Again, if you would like to discuss eBay, please contact Ronald R. Redfield, CPA, PFS (partner in charge of investment management division).

Information herein is believed to be reliable, but its accuracy and completeness cannot be guaranteed. Opinions, estimates, and projections constitute our judgment and are subject to change without notice. This publication is provided to you for information purposes only and is not intended as an offer or solicitation. Redfield, Blonsky & Co. LLC and Ronald R Redfield, CPA, PFS, may hold a position or act as an advisor on any investments mentioned in a report or discussion.