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eBay's on sale. Time to make a bid?
Slowing sales growth in the States worries some investors, but may inspire others to get in.
June 13, 2005: 6:26 PM EDT
By Paul R. La Monica, MONEY Magazine

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Sales up overseas
As eBay's domestic business slows, the company's growth overseas remains torrid.
12-month U.S. sales growth12-month foreign sales growth
2004 Q143%91%
Q236%82%
Q333%88%
Q428%72%
2005 Q122%58%
Source:eBay

NEW YORK (MONEY Magazine) - Will eBay shares soon be fetching less than the kitschy trinkets for sale on the popular auction site? Slowing revenue growth in the U.S. and big investments abroad have investors worried. But with sentiment so negative -- shares have plunged almost 40 percent this year -- this looks like a good time to buy for the long haul.

What the bulls say

eBay's profit growth has slowed and its domestic business is leveling off, sure, but management still expects earnings per share this year to increase 25 to 28 percent from a year ago. Not bad for a company expected to tally $4 billion-plus in revenue this year.

"The company hasn't disappointed at all," says Kent Mergler, president of Northstar Capital Management, which owns more than 350,000 shares of eBay.

Still, some analysts are dismayed that eBay is sacrificing short-term profits abroad to gain market share. It is charging users in China almost nothing, for example, to sell items or set up online stores.

Such fees generate more than 75 percent of eBay's revenue, but this loss-leader gambit should pay off in the long run, given the rising importance of overseas markets to the company's growth (see the table).

CEO Meg Whitman said during a May speech in Beijing that China could be the company's biggest market in five years.

For this reason, Tom Taulli, co-founder of Current Offerings, an independent research firm, bought eBay stock after shares tumbled earlier this year. "eBay is the best brand on the Internet," Taulli says. "There is still a lot of growth ahead."

What the bears say

While eBay remains the market leader, search engines, as well as Amazon.com and Overstock.com, have emerged as threats.

"There is no longer a perception that eBay has few meaningful competitors," says Derek Brown, an analyst with Pacific Growth Equities.

The company enraged some merchants by raising monthly fees in February. Mass defections haven't occurred yet, but Brown maintains that more small merchants are turning to advertising on search engines.

That, he says, is hurting eBay's fixed-price business, which allows people who don't like auctions to buy products at a set price. And despite Whitman's China speech, it's not a given that overseas growth will turbocharge profits.

"eBay will need a lot from other markets to make up for the U.S. slowdown," says Martin Pyykkonen, an analyst with Janco Partners.

Finally, eBay is a "momentum" stock; it must handily beat earnings estimates or be ignored.

"For a long time, eBay would blow away the numbers. But the growth is not coming as easily as it once did," says Barry Randall, manager of the First American Technology fund, which sold its eBay stake in February.

Bottom line

eBay is no longer bulletproof. But that's reflected in its share price. At $37, the stock trades at 37 times 2006 earnings estimates, or 1.2 times the company's projected earnings growth rate. Slower-growing Amazon.com trades at 1.8 times its growth rate.

Investors can also take comfort in the creativity of Whitman and other senior managers. Faced with a slowdown five years ago, they transformed eBay from America's online garage sale to the leading middleman for small businesses.

Legg Mason analyst Scott Devitt thinks eBay's bet on foreign markets will start to pay off in the next year.

"One question that's asked a lot about eBay," he says, "is whether its business model is broken. I don't think so."

For more technology news, click here.

Click here for more of Paul LaMonica's Tech Biz columns.


Editor's note: This story was published before eBay announced it was buying Shopping.com.  Top of page

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