eBay Loses Some Mojo

Miffed that the online auctioneer missed Wall Street's forecasts, investors battered the stock. Is the giddiness gone for good?

By Robert D. Hof

The e-commerce rocket ship called eBay finally fell to Earth on Jan. 19. Despite hiking fourth-quarter revenues 44% and slightly upping forecasts for 2005, the online marketplace's profits fell a penny short of analysts' estimates -- the first time in years it missed a quarter. As a result, investors hammered the stock on Jan. 20, dropping it more than 19%, to $83.33. That was on top of a 3% drop, to $103.05, before the report.

Why the big sell-off? Investors had been betting that eBay (EBAY ) could keep demolishing forecasts, bidding up the stock by more than 60% last year to a level that gave even eBay bulls nosebleeds. "It has been priced for perfection," said Scott N. Devitt, an analyst with Legg Mason Wood Walker.


  But while the crucial holiday quarter would be the envy of nearly any other company, for eBay it was anything but perfect. Not only did revenues of $936 million merely meet expectations in a quarter in which they usually outperform, but profits of $205 million fell slightly short of investor hopes. The apparent culprits were many: a slower-than-expected holiday season, rising marketing expenses, and bigger investment plans this year that will keep a lid on profits. "It's a huge disappointment," says Mark Mahaney, an analyst with American Technology Research.

eBay's surprising performance quickly rippled through the market, especially e-commerce stocks. Amazon.com (AMZN ) and Overstock.com (OSTK ) both fell on Jan. 20, though by a more moderate 3% to 6%. The overriding worry: If the e-commerce champion can't deliver, who can?

None of this means eBay is in deep trouble. Far from accepting a slowdown in its business, it's clear the company is doubling down. Essentially, it's betting some of the gains from last year on new initiatives that it hopes will pay off in 2006 and beyond. In total, eBay said it plans to invest at least an additional $300 million into the business in 2005, up from $200 million it estimated a few months ago. "We see several large opportunities that have even more potential than we thought," Chief Executive Margaret Whitman told analysts on a conference call.


  Those opportunities cut across much of eBay's business. For one, it's planning to spend at least $100 million, mostly in marketing, to expand its fast-growing China operation. eBay lost its foothold in Japan several years ago to Yahoo! (YHOO ) because it was late to the game. This time, it doesn't want to miss what Whitman said is likely the world's largest opportunity in e-commerce.

eBay is also planning to invest more in PayPal, its payment-processing system. The goal: to make it the top worldwide standard for person-to-person payments, even for transactions outside eBay.com. Plus, the company is planning to beef up its technology infrastructure. Whitman said those initiatives, while dampening profit upside for 2005, may add several percentage points of compound annual revenue growth in 2006 and beyond.

Still, the specter of eBay's first serious quarterly miss in memory haunted investors and analysts. Clearly taken aback, they expressed several concerns. The biggest: Why is revenue growth slowing down, especially after eBay upped marketing spending by a stunning 56% in the fourth quarter and posted only a 44% rise in sales? "Where's the leverage?" asks Mahaney, who suggests that perhaps eBay's business, and e-commerce in general, requires more marketing than some had thought. Whitman noted that advertising rates, both online and in magazines and TV, were rising.


  The biggest disappointment came in international sales. They rose 60%, but that's way below the 70% analysts expected -- and far under the third quarter's 82% clip. "This is really the growth engine of the company," notes Legg Mason's Devitt.

Rajiv Dutta, eBay's chief financial officer, attributed slower sales both in Germany, eBay's largest international market, and in the U.S. to shoppers' late start on the holiday season -- something that afflicted most retailers. Although activity picked up to record levels by Thanksgiving, Whitman conceded, "You never make up those lost sales 100%, and that's what happened."

Although quarterly sales ended up meeting forecasts, the slowdown raises new fears about whether competition is finally having an impact on eBay. On Jan. 14, it said it would raise fees on a broad range of services, starting Feb. 18. As always, that angered many sellers, who are threatening again to try other venues.


  Indeed, discount e-tailer Overstock.com said listings on its new auction site jumped 50% right after the announcement. And alternatives such as Amazon.com's Marketplace and search-service Google's (GOOG ) paid search ads are growing rapidly. "We see sellers looking at alternatives," says Scot Wingo, CEO of the online-services firm ChannelAdvisor.

Despite the disappointing quarter and plans for more investment, eBay slightly raised revenue estimates for this year to about $4.3 billion, up about 31%, and maintained profit forecasts at $1.37 to $1.41 a share, well higher than last year's $1.14 a share. And analysts say they have no doubt eBay will remain dominant long-term.

But after outgunning expectations for so long, eBay may take awhile to build up its ammunition again.

Hof is manager of BusinessWeek's Silicon Valley bureau

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