We have looked at Berkshire and EBay in this blog at different times in the past year. We have owned both EBay and Berkshire and continue to hold on to Berkshire at this time. In the article in December of last year, looking at all internet stocks - we made the following observation.
Of the lot, EBay looks the priciest for its growth followed by Google, Amazon and Yahoo!. Amazon's balance sheet doesnt look pretty with cash, cash equivalents and marketable securities declining year over year. The overall balance sheet looks better than last year and the growth is still good. Google's growth rate is going to decline slightly next year - as noted in an earlier blog, next year's growth is already priced into the stock.
Regarding Berkshire, we had the following to say in January of 2006.
The traditional analysts get carried away with the P/E ratios without really analyzing the underlying financials. The financials look very sound and solid. Given that it is highly unlikely that the company will ever be sold at liquidation value, it is safe to say that Berkshire provides a good safe base and alternative to SP500 index. In a diversified portfolio, one should consider having Berkshire in the mix.
Now that a good six months have elapsed since these were written, it doesnt hurt to take a look at both these companies and apply some analysis to see how each of this stock looks like.
Ebay traded at $44.46 on 3rd January 2006 and is currently trading at $24.2 as of 4th of August 2006. Berkshire on the other hand traded at 89700 on 3rd January 2006 and is trading at 91710 currently. Ebay's stock has declined 54% while Berkshire stock has gained 2.24% in the same period. Short term price movements hardly indicate stock fundamentals, so we will look at both these stocks from different perspectives.
First an overview of the two companies to look at no brainer issues. Ebay specializes in providing an online market place for buyers and sellers. This enables all sort of goods to be bought and sold. Berkshire on the other hand is a conglomerate operating in great many businesses in many different segments. Ebay has a market cap of 34 billion where as Berkshire has a market cap of 141 billion. Ebay's business is technology centric - major technological changes can cause headaches to Ebay. The proliferation of search and the presence of many websites that offer the online market place to buy and sell will enable the users to look for the best deals available without sticking to Ebay. I have bought DVDs and used books from Ebay but not before searching for the best deals in other web sites. What this means is that Ebay will have to continue to invest in technology to remain relevant.
Technology for the most part will help improve Berkshires businesses. The clothing can be produced cheaper and insurance issuance can also get better and faster with new technology. The Berkshire businesses that are vulnerable to technology are real estate agency and newspapers and represent a tiny fraction of the company.
The cash flows from operating activities increased 11.5% in Berkshire for the first six months of the year to 3.4 billion. Berkshire also gets cash flows from investing activities. The cash flows from investing activity is uneven and Berkshire netted 1.5 billion in the first six months of the year from investing.
The cash flows from operating activities in Ebay was 1 billion for the first six months of 2006 a gain of 10.9% compared to 2005. The cash flows from financing activities was 175 million dollars in 2006.
The stock holder equity in Ebay is about 11 billion, about 33% of the stock value. Berkshire on the other hand has the stock holder equity of about 96 billion or about 70% of the stock value.
Ebay has cash and equivalents of about 2.6 billion on its balance sheet compared to about 40 billion for Berkshire. Berkshire had a stock dilution of 0.13% year over year compared to Ebay's 4.2% dilution year over year.
Management Clearly, Berkshire has a line of heavy hitters that cant be matched easily by anyone else. Ebay's management on the other hand is competent and is as good as any other dot com around. Berkshire is heads and shoulders above Ebay when it comes to capital allocation and investing and it is not likely to change even with the change of guard in Berkshire.
Long term view Thirty years from now, online market place for goods and services will certainly exist. However, it is not clear if Ebay will be the market leader in that segment or not. The presence and expansion of market players such as Google, Yahoo! and Microsoft could lead to convergence and elimination of some of today's leaders. Ebay's moat is from its web portal and technologies such as paypal. The Ebay moat is not as large as it seems as better deals and technologies can lead traders and customers elsewhere. Meanwhile, Berkshire's businesses in insurance, energy distribution and many low tech areas needed for human existence every day will be boosted by increase in U.S population and growth in investment value. Longer term, Berkshire is a better bet than Ebay.
Ebay is a good business . July to December time frame has always propelled Ebay stock higher and this year may be no different. Although Berkshire has higher overall capitalization and larger size. Berkshire boasts of better earning growth and cash flow growth at the moment than Ebay despite its size. Ebay also benefited from sale of stock options in its cash flow statements. Berkshire is a more compelling value than Ebay at the moment and possibly presents a bigger upside in the next ten years than Ebay does.