eBay Vote Shows a Return to Complacency

eBay representatives did not return calls seeking comment on the proxy vote.

It's understandable that eBay shareholders would favor the status quo. With a business model tailor-made for the Internet, the company has taken and maintained a dominant share of the online auction market and a significant portion of overall e-commerce. Analysts generally consider it the only clear winner among the companies that started in the dot-com boom.

However, the results have not been as good as the company purports.

Hidden Cost of Options

If it had been required to include the cost of stock options in its reporting, eBay would have been unprofitable in three of the past five years. Although the company would have been profitable last year, taking into account options expense, its earnings would have been slashed from its reported $249.9 million, or 85 cents a share, to $62.9 million, or 21 cents a share, according to eBay's own estimates. Meanwhile, Standard & Poor's calculates that eBay's core earnings, which exclude one-time gains and charges, while including stock-based compensation expenses, were just 17 cents a share last year.

In the meantime, much of the cash generated by the company has come from the issuance of stock options, rather than its actual auction business. A tax benefit related to employees selling stock options accounted for about 20% of eBay's operating cash flow last year. Combining this tax benefit with the direct cash the company raised from employees selling options, eBay's total option benefit last year was $346.8 million, a total greater than its free cash flow.

Still, while eBay's profitability might be a matter of debate, the rise of its share price is not. eBay shares are up more than 50% in the year to date. At more than $100 a share, they are within striking distance of their all-time high of $127.50, set in March 2000, immediately before the market crash.

As the stock has raced up, institutional investors have rushed in. In the first quarter of this year alone, institutional investors bought a net 11.8 million shares, a stake now worth about $1.2 billion.