With Shortfall, eBay Joins the Ranks of Mere Mortals

Investors took a crowbar to eBay (EBAY Quote - Cramer on EBAY - Stock Picks) after the online auction site failed to live up to its heady billing.

Over the last year, the San Jose-based company earned a reputation for pleasing Wall Street, steadily boosting expectations even as the economy stalled and rivals ran into trouble. But the honeymoon ended Monday, when eBay projected 2002 earnings that were only even with still-rising expectations. The stock plunged, dropping $3.71, or 7%, to $53.29.

Dropsy Join the crowd, eBay

The company, which provided the guidance in a press release as it held its annual analyst meeting, forecast 2002 earnings of 70 cents to 73 cents a share. That's even with the 73 cents a share projected by analysts interviewed by Thomson Financial/First Call. But as recently as April, the consensus was for 68 cents a share, according to I/B/E/S.

At the same time, eBay said revenues would likely beat consensus expectations. The company said it expects 2002 revenue between $1.05 billion to $1.1 billion, compared with analyst expectations of $1.03 billion. The company also reaffirmed its closely watched goal of raking in $3 billion in revenue by 2005.

eBay also said operating margins will grow to 30% to 35% before 2005, compared with around 24% this year. Gross margins will reach the mid-80% range, compared with 82% in the third quarter.

At the analyst meeting, the company highlighted eBay Motors, its automobile site, and computers as growth areas, and said it expects its international division to be profitable by 2002.

The company recently released solid third quarter earnings, yet the stock fell on that news as investors were disappointed that fourth quarter guidance merely fell in line with Wall Street expectations.

Still, eBay is clearly in a different league from its Internet rivals. The company is profitable and is growing steadily at a time when the economy is weakening. Unlike rival Amazon.com, it has kept the respect of Wall Street. But that doesn't mean the stock is a good investment.

The stock's valuation -- it trades at a pricey 121 times this fiscal year's estimated earnings -- is what makes investors nervous. And that is why the stock falls when the company simply says its earnings and revenues next year will be in the same ballpark as Wall Street's expectations.