eBay's Asking Price Is Too High

Picture a pouting Angelina Jolie propped up on a bar stool in one of Anchorage's less salubrious watering holes in midwinter, and you'll understand why tech investors are so passionate about eBay(EBAY Quote). Against the burnt-out, badly run Internet companies that clutter the Nasdaq, the online auctioneer looks drop-dead gorgeous.

But easy comparisons do not a good investment make. eBay, while an impressive company, does have flaws and challenges, neither of which are reflected in its bubble valuation. It trades at more than 130 times estimated 2001 earnings. The stock may go as high as $75 to $80 from here because people are looking for something to believe in, the Fed is doing all it can to prop up stocks and eBay's management is more than halfway competent. But at current levels or above, the slightest stumble could send it down to the $40 to $50 range. And believe me, the chances of a stumble are a lot higher than people think.

eBay will suffer as people tire of using the Web. Buying stuff online is infuriatingly cumbersome for anyone without a T1 line or other fast Internet connection. Shoppers are already logging off. A recent Forrester survey showed the number of households shopping online dropping. Think about that for a second. After only three or four years, the Web market is shrinking.

I hate it when financial reporters draw lessons from personal experience in sub-Peter Lynch fashion. But having used eBay for about 10 purchases now, I have found the site's "buying experience" to be quite unfriendly. It's awkward to track items on a regular basis -- no matter how many times I try to get the site to recognize my computer's cookie, it won't -- and paying the vendor takes a lot longer than on other e-tailers. One time, a video of Jungle Book I bought for my 3-year-old daughter didn't play. Of course, I could have sent it back, but that's the added hassle of eBay. Next time I shop I'll go to the Disney site to see if they're selling it new, and I'll buy it there even if it's more expensive.

For these reasons it'd be nice to see to see how long users are sticking around. But because user totals include acquired users, it's hard to gauge churn rates. And, with its pricey stock, eBay has been able to acquire lots of foreign entities, masking the behavior of its fast-maturing U.S. base.

What's more, those foreign acquisitions haven't come cheap. It paid as much as $112 million for Europe-focused iBazar. That worked out to $47 per iBazar user, way above a companywide customer-acquisition cost of $11 to $16 per new customer. Moreover, iBazar had gross merchandise sales per user of only $40, compared with eBay's companywide $70 per user in the second quarter. Sure, eBay can improve acquired operations, but such numbers show that acquired-user growth hasn't been cheap.

And there's a chance eBay might use its rich valuation to do a really dumb deal, like snapping up a faltering Web outfit that appears to have "reach." Think of Yahoo!(YHOO Quote) as a target if it ever falls below $10, which I think it will by the end of 2002 (unless Microsoft throws cash at Yahoo!, that is -- The Wall Street Journal's Kara Swisher reported on Monday that Yahoo! and Mister Softee have talked).

eBay's management is worshiped on Wall Street, which is always a reliable sell signal (except when said management has enough resources to manage earnings, like GE and IBM's). eBay CEO Meg Whitman et al. were guilty of Bezos-like vainglory in predicting $3 billion in revenue in 2005. As a recent column of mine pointed out, that requires a pickup in growth from the pace analysts predict for the next 12 months or so, an assumption that smacks of 1999 bubble-thinking at its most egregious.

But without eBay, there'd be no hope for tech in believers' eyes. Those believers will just have to accept that there is no hope. eBay's decline, most probably by year-end, will be the final epitaph on the tomb (raider) of tech.