All things go through a cycle. In business, the cycle is decidedly poignant, occurring throughout entire industries, as well as in the life of individual companies.
A small company generally experiences significant crises just trying to get established with some solid sales. Profitability is often not achieved in the early stages of development. Once a company finds its footing, however, it really has the potential to take itself to a much higher level of operability. With an established product line, a company can experience significant growth as it hones its marketing and expands its sales force throughout the economy. Then, there is a maturing cycle where the rate of growth slows, but profitability is at its height.
Finally, a company can experience a decline in its business if it doesn’t innovate and adapt to the changing needs of the marketplace. Often, a company gets too big or has expanded too much for its own good. Two good examples in this area would be GM and Wal-Mart.
You always want to try to figure out where a company is in its business cycle before you invest in its shares. You don’t want to be the last one to the party.
I bring this subject up because I can’t get eBay out of my head. My wife loves this company and uses the service all the time. I’ve never bought anything from eBay, but I do check it out when comparing prices for used goods. eBay is like the ultimate business entity for the Internet. It is a brand and a platform that everyone can use. So why is eBay’s stock price declining? Is the company in decline or is the stock telling us something?
The stock has had a terrible year so far, trading now around $34 per share, down from an all-time high of around $60 at the beginning of the year. eBay’s been such a leader, both as a business and a stock, that its complete breakdown on the stock market really bothers me. I can’t escape the notion that its stock price performance is foreshadowing the general trend of the market.
There is no question that eBay is a company in the maturity of its business cycle, but it still has lots of staying power. This is why its stock price action bothers me so much. The stock’s been going down on increasing trading volume. From my perspective, this spells trouble ahead for the broader market. I hope I’m wrong.