EBay Investors Wary of Lofty Stock Price
SAN JOSE, Calif. – Investors in EBay Inc. worry the online auction company’s lofty stock price is too high, along with concerns about a pricey push into developing countries that don’t have widespread Internet access.
EBay shares tumbled Wednesday, after the San Jose, Calif.-based company posted second-quarter earnings that more than doubled and narrowly beat Wall Street’s expectations.
Shares in eBay fell nearly 10 percent Wednesday, including a 5-percent fall after the earnings were released. The shares closed at $76.60.
On Wednesday, the company reported that “general and administrative” expenses – including payments to some accountants, lawyers and consultants – swelled to $102.9 million, up from $69.5 million in the same period of 2003. That’s more like a bloated bricks-and-mortar retailer than a high-margin dot-com, critics said.
The company also announced that second-quarter transaction revenue in the United States – eBay’s largest market – was $319.1 million. That’s up 32 percent from the same quarter of 2003, but it’s down 2.2 percent from the record first quarter of 2004.
“I can’t remember the last time that eBay has been down sequentially, if ever,” said Internet analyst David Garrity of Caris & Co. “High-growth companies perform well not only in year-over-year comparisons but sequentially, quarter over quarter. If eBay wants us to think of them as a mainstream company, fine – but then it has to have a mainstream valuation.”
Even after losing about 20 percent of its value since hitting a 52-week high of $94.46 in late June, EBay’s price-to-earnings ratio – a critical measure of Wall Street’s bullishness of a company – was 93 on Wednesday. By contrast, Microsoft’s ratio was 33. Wal-Mart Stores Inc. was 25.
“There needs to be a blue-light special on eBay shares,” Garrity said.
Investment banks including Prudential and American Technology Research downgraded eBay last quarter. Based on concerns that it couldn’t sustain lofty valuations, JP Morgan, Caris & Co. and Friedman Billings initiated coverage with lackluster rankings such as “market perform” and “average.”
For the three months ended June 30, the former Wall Street darling earned $190.4 million, or 28 cents per share, compared with $91.9 million, or 14 cents per share in the same period of 2003. Excluding special items, eBay earned $197.7 million, or 29 cents per share, up from $103.1 million, or 16 cents per share, in the first quarter of 2003.
Analysts expected eBay to earn $185.4 million, or 27 cents per share, on sales of $769.46 million.
EBay reported second-quarter revenue of $773.4 million, up 52 percent from the same period last year.
Executives slightly boosted their outlook for the rest of the year, based on the strength of the company’s PayPal payment transaction division, and eBay’s fledgling operations in China, India and other international markets. The company expects 2004 sales as high as $3.185 billion, $35 million higher than it previously predicted.
But analysts worried that foreign operations exposed eBay to currency swings; the added cost of offices and employees in foreign countries; and expensive ad campaigns in numerous languages. Overseas competition could come from rivals such as Sunnyvale, Calif.-based Yahoo Inc., which is aggressively expanding in China, or foreign startups.
Increased international sales also expose eBay to heightened seasonality – monthly revenue fluctuations that investors generally dislike. In Europe, summer vacations bring e-commerce to a near halt. In Asia, storms or power outages can dent sales for weeks.
Chief executive Meg Whitman, who fielded numerous questions from analysts about seasonality during a conference call Wednesday, acknowledged that European vacationers made the second quarter relatively sluggish.
“There’s no question seasonal trends are becoming more pronounced as eBay becomes more mainstream,” Whitman said.
Impatient investors were also concerned that limited Internet access would stymie eBay’s potential for at least a year in China and India – two markets eBay has targeted for rapid expansion.
Last month, eBay announced a $50 million acquisition of Indian auctioneer Baazee.com, India’s most popular online shopping site. India has more than 1 billion people but only 4 million Internet connections. Relatively few Indians have credit cards, which are used by most eBay shoppers.
“We think India is more of a 2006 than a 2004 story for eBay,” Mark Mahaney of American Technology Research wrote in a report this week. “But we think the company is doing the right thing to track down these growth opportunities.”
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On the Net:
eBay: http://www.ebay.com
Baazee: http://www.baazee.com