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Accounting Allah shmoop gross revenues or net Okay So remember

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your little lemonade stand Just freakin lemons Well when you

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started your business you only took cash Dolla dolla bills

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no money back guarantees but you've evolved So now let's

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say your lemonade stand takes credit cards and you've set

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up a deal with Visa and MasterCard so that they

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take a nickel for each sale of a dollar that

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you've made And for now we'll just ignore the monthly

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fees set up charges and penalties for hell doings Teo

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keep things simple So when you report revenues do you

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report a dollar and then have a nickel of cost

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Always or do you report ninety five cents Is your

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revenues on sales made from a credit card purchase Well

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in this case you reported dollar and just deal with

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credit card processing costs as a gross expense line item

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Why Why would you do this Because if you didn't

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it would cloud things like when in doubt disclosed One

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could then ask Well why do some lemonade cell for

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a buck and other cell For ninety five cents we'll

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ever note that a lot of restaurants and other small

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businesses charge you extra if you use a credit card

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versus just paying them in cash or a check Yeah

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it's clearer cleaner accounting to show your work in this

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case But here's another rub EBay offers a bunch of

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merchandise for sale in its garage sale like environment It

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sells a slightly used six thousand dollars hot tub for

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fifteen hundred box Or at least that's the auction price

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But on the sale of the hot tub eBay doesn't

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own the hot tub They're just the listing agent behind

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the sale for which they take a commission Call it

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in a five percent in this case or seventy five

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bucks for the sale And yeah that's the map So

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does Eva Report fifteen hundred as revenues or seventy five

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dollars Well in reality it reports both But the former

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is reported as gross merchandise sales or merchandise offered and

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then they more or less ignore the numbers in the

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rest of their income statement Well why would they do

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this Because gross merchandise is a very good proxy or

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indicator for future commissions likely coming eBay's way It's also

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good is a checkpoint for what the commission rates actually

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were If you're an eBay power seller well you'll know

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that really Commission prices or rates are all over the

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map and higher rates would be an indicator that eBay

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has Mohr power with the selling community versus other ways

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in which those garage sales could get distributed and happened

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Well one other perspective is worth thinking about here After

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a seventy five dollars sale eBay has a bunch of

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costs keeping the website up lawyers tracking fig bars for

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the snack area and so on So on that seventy

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five dollars sale even a might have in twenty five

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dollars in pre tax profits well on seventy five bucks

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a revenue twenty five in pre tax profits That's a

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thirty three percent pretax margin business which is pretty high

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margin and kind of fits with the margin structure of

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analogous software companies How weird would it then be to

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have had a Bay Show fifteen hundred dollars as revenues

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from the sale of the hot tub with um you

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know stains on it and then net twenty five dollars

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in pre tax profits Well you go from a thirty

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three percent margin business to being a one point seven

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percent margin business weird Something would then be rotten in

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the state of eBay Note that at the time of

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eBay's AIPO there were a lot of similar company sedative

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commerce companies out there that had no real earnings or

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even tangible profit metrics that anyone could measure meaningful E

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So then how are they valued by savvy Wall Street

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investors Yes as a multiple of revenues and they did

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not define revenues very well If you showed hugely high

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revenues well then you were relatively cheap Think about the

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vast difference in revenue multiples on a company showing fifteen

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hundred seventy five dollars as revenues and yes less that

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two percent margins versus a company with seventy five dollars

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of revenue and thirty plus percent margins Well if they

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were each valued at three thousand dollars than the one

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that included the actual hot tub cost traded at quote

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only two times revenues unquote and the one that was

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reporting a more honest pure relevant number in revenues to

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the company and real profits they be trading at a

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staggeringly high three thousand divided by seventy five or forty

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times revenues valuation Well in reality eBay actually had real

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earnings or profits over time and didn't need the sleazy

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marketing is that a lot of other companies adopted Karma

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is real However all of those companies those would be

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eBay and knockers offers they're all long dead and buried

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and now you can buy all their tombstones ironically on 00:04:32.808 --> [endTime] eBay

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