eBay's Diminished Expectations

The online auctioneer's humdrum future growth forecast took a toll on its stock. Can new offerings get it buzzing again?

Can eBay ever persuade investors it's still a growth stock? Not if it keeps putting such a damper on expectations. That's just what it did with its Apr. 19 earnings report, the second straight quarter in which it has offered muted guidance on future growth. The online marketplace reported a first-quarter profit of $248 million, down 3% thanks to stock-option expenses kicking in for the first time. But that was already expected, and eBay (EBAY) also delivered on-target revenue growth of 35%, reaching $1.4 billion in sales.

The main problem: eBay's forecast for the coming year once again merely met analysts' predictions -- and the low end of those predictions to boot. eBay said it expects to see revenues rise to between $5.7 billion and $5.9 billion, meaning growth of 24% to 28%. That's below the 30% growth, or $6 billion figure, analysts, on average, expect. "We think it's prudent at this stage to be conservative" in forecasts, Bob Swan, eBay's new chief financial officer, said in an analyst conference call.

But as a result, eBay's stock price fell about 5% in extended trading on Apr. 19. eBay's stock had already been down 13% from the start of the year, thanks to investor concern about whether it can keep up the pace amid mounting competition. But investors were primed for better news when, just before the earnings report, two positive analyst outlooks lifted the stock 4%, to $40.35, at the market close. That better news didn't materialize.


 Compared with most businesses its size, eBay's results and its outlook still look quite healthy. That's not only in the marketplace businesses, including eBay.com, but in payments and communications. Its PayPal online-payment unit saw revenues soar 44%, to $335 million. And Internet phone unit Skype, acquired last September, logged a 42% jump in revenues, to $35 million.

As for its core marketplace business, at least some eBay sellers report that sales remain good. "My business has been strong," says Jonathan Garriss, CEO of online shoe retailer Gotham City Online, which also sells on eBay. "We certainly like the traffic we've been seeing. Whatever eBay's been doing, they're continuing to bring in the buyers."

But not fast enough to boost the confidence of eBay or its investors in its near-term prospects. Indeed, some sellers have reported for some time that their profit margins on eBay are eroding. That's one factor that has prompted some of them to move some of their inventory to other marketplaces, such as Amazon.com (AMZN), Overstock.com (OSTK), and Google Base (GOOG).

"There are a lot of signs pointing to a slowdown in business activity within eBay's marketplaces," says Derek Brown, an analyst with Pacific Growth Equities, who has a sell rating on the stock.


  What's more, search giant Google is coming on strong. Its free Google Base listings service, coupled with a new payment system, threatens to undercut eBay by offering merchants a cheaper venue on which to sell. "They're definitely seeing more competitive threats," says Rodrigo Sales, CEO of Vendio Services, which helps merchants sell online at venues such as eBay.

eBay's not standing still. Next week, CEO Margaret Whitman says, eBay will debut a new site called eBay Express, which will gather up eBay listings of new products that can be bought instantly at fixed prices, and present them in a more Amazon-like setting (see BW, 4/17/05, "eBay's Bid For Impatient Shoppers").

"As e-commerce grows, there's a trend away from the bargain seller to a more mainstream seller," says Scott Devitt, an analyst with Stifel, Nicolaus & Co. "eBay Express has the potential to provide a more traditional e-commerce experience."


  Some sellers are eagerly anticipating the arrival of eBay Express. David Yaskulka, CEO of luxury-apparel merchant Blueberry Boutique, says he hopes his customers, who generally want to buy fairly quickly rather than go through an auction process, will like the immediacy of eBay Express. "We expect to sell more of our inventory on eBay if eBay Express works," he says.

But such investments will take a while to make a noticeable impact. Meanwhile, eBay's heading into what's traditionally the slowest two quarters of the year, as people head outside or go on vacation over the summer instead of clicking on buy buttons. All that could keep investors on the sidelines for some time to come.

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