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eBay Excels but Investors Fret About the Future

The latest period's solid results are overlooked in favor of a limited 2002 outlook.
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Updated from 4:36 p.m. EDT

Once again, investors are keeping

eBay

(EBAY) - Get Report

on a short leash.

Shares fell 5% in after-hours trading Tuesday, even after the company topped estimates and said its performance in the first two quarters of 2002 would be in line with what most analysts expected. Apparently, Wall Street assumed the worst after the company failed to deliver the expected full-year 2002 financial guidance.

For its fourth quarter, eBay earned 14 cents a share on revenue of $219.4 million, compared with 9 cents a share on revenue of $134 million a year ago. On average, analysts had expected eBay to earn 13 cents a share on revenue of $211.8 million, according to Thomson Financial/First Call.

Strong Showing

The company clearly benefited from an aggressive marketing plan that included, for the first time, circulars in major newspapers. Meg Whitman, eBay's chief executive, said in a conference call that the company was "dead on" in its advertising, and said the fourth quarter was strong "because we are beginning to explain to consumers that we are a destination for the holidays."

The company offered guidance for the first half of 2002, saying it expects earnings of 32 cents to 33 cents on revenueof $490 million to $510 million. These figures are generally in line with what analysts and investors had expected. Safa Rashtchy, who covers the company for US Bancorp Piper Jaffray, expects earnings of 32 cents on revenue of $502 million. (He has a market perform rating on the stock, and his firm doesn't have a banking relationship with eBay.)

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In after-hours trading on Island, shares were trading at $60.65, off $3.38 from Tuesday's closing price of $64.03.

Wanting More

At the company's analyst day in October, the company had indicated that revenue in the first half of the year would be about $460 million, and predicted revenue of about $1.05 billion to $1.1 billion for the full fiscal year. It pegged earnings at 70 cents to 73 cents, although some on Wall Street are saying the company, which has a history of giving conservative guidance that it later beats, could potentially earn $1 a share.

"What we have done is already provided full-year guidance," said Rajiv Dutta, eBay's chief financial officer, in a conference call with investors.

In similar fashion last October, investors sold off shares after the company said it merely expected to meet expectations. Shares later rebounded and are up roughly 50% since the market bottomed in late September in the wake of the terrorist attacks.

In the fourth quarter most metrics looked solid, and there were no indications the company's ambitious growth targets are in jeopardy. The company has said it expects $3 billion in revenue by 2005, a goal that implies about 50% annual growth rate. Gross margins remained steady at 82%, and the company said its margins could edge up to 83% in 2002.

Rise to Globalism

For the first time, the company said its international businesses were profitable on an operating basis, a development that is likely to be applauded by analysts. International auction listings are growing at roughly 5 times the rate of domestic auctions, yet the cut eBay gets from each completed auction is only half that of U.S. sales, according to estimates provided by Steve Weinstein, an analyst at Pacific Crest Securities. In the conference call the company added that its international businesses will be profitable for the full year of 2002.

In the quarter, revenue from international sites -- many of which do not yet charge fees -- rose to 18% of total revenue, up from 16% in the previous quarter. The company said the gains were led by its operations in Germany, Canada and the U.K.

The company also said that big-ticket items, such as automobiles and electronics, were some of its largest categories. "The auto business continues to be incredibly robust," Whitman said.

For investors, the valuation question remains. With the days of continually topping estimates apparently at an end, the question of what is fair value for the shares will perhaps become more important. At recent levels shares trade at over 80 times estimated 2002 earnings.

"It was a great performance," says Rashtchy, the analyst at US Bancorp Piper Jaffray. "My only concern is that the Street just expects higher and higher growth to continue. But from here on growth will be pretty much as expected, with little upside."