Crime and EBAY; A recipe for a short position

March 19, 2007 7:02 am

EBAY and Paypal are the new targets of Nigerian scam artists. Has anyone thought about the effects? Aside from reading a few items and seeing a recent news expose` on the problems (EBAY) is having with “online fencing of stolen goods”, I have not seen much alarm at this trend, but the recent scams are very disturbing, and they have hit too close to home.

EBAY is based on trust between seller and buyer. Without that, there is no EBAY. Buyers can just as easily go to online stores with good reputations. Sure, they MAY have to spend a little more, but since EBAY is no longer always the cheapest price, the shine may be off the chrome.

While this is not a new idea as the scammers have been around for a while, it is a disturbing trend and one that needs to be addressed by investors.

If scammers continue to steal accounts, fraudulently buy goods and then try to dupe the seller to login to a phished paypal there will be fallout. How about when they ask to send a product and request shipping verification before the seller receives any money? Once again this could create a real pullback in revenue from higher end products like electronics. This is a big segment for EBAY.

With YTD numbers down and a consumer with less to spend, could this mean a perfect storm is brewing for the once darling of Wall Street? We think it is possible.

Carefully watch the breakdown of revenue and the trends YOY as well as quarterly. If there is more slippage support may be breached.

Trust is at stake here, once broken it may take a long time to gain back.

As of the writing, our clients are SHORT shares of EBAY primarily due to the reasons outlined.

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