eBay Learns Lesson in Guidance Game

Call it the curse of the conservative.

A day after eBay said its pro forma earnings came in a mere penny below analyst expectations, the stock was trading down 18% at $84.92. In less than a day, eBay's stock gave up $12 billion in market cap, nearly all of the gains it steadily built up since last September.

Analysts, who had been falling all over themselves to sing the praises of eBay's growth prospects, if not its highflying stock price, were falling all over themselves to downgrade the stock Thursday.

Is missing earnings by a penny really so bad? It is, if you consider how eBay has played the guidance game for years. It takes a very conservative approach, aiming for that sweet spot where the number is significantly higher than the previous figure, but still impressively below the number you ultimately post. Few companies have the financial health and the sharp management necessary to pull this off. Microsoft(MSFT) and Cisco(CSCO) have succeeded at it; like eBay, both took on the sterling sheen of a blue-chip stock as a result.

But this strategy leaves no room for mistakes. Wall Street begins to expect miracles from you every single quarter -- and nobody gets miracles every single quarter.

There is a twisted moral in here somewhere about the dangers of erring on the conservative. For today, most eBay followers are just looking for a firm grip on where the online auction leader is going. Analyst reports greeted eBay's earnings with a scowl. AmTech Research, Caris & Co., Deutsche Securities and Marquis Investments lowered their ratings on eBay to hold from buy (Marquis had upgraded eBay only two weeks ago), while Friedman Billings and Piper Jaffray downgraded it to market perform from outperform.