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eBay Needs to Show It Won't Slow

With its lofty valuation, the online auctioneer needs to prove it can continue its awesome growth.


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is the undisputed king of the e-commerce hill, but some investors are wondering how long it can keep its footing.

Some indication of eBay's staying power may come Tuesday, when the auction giant reports its first-quarter earnings. The San Jose, Calif.-based company is widely expected to beat its previous guidance of 30 cents a share and to increase expectations going forward.

But instead of focusing on the company's short-term results and projections, some investors will be taking a look at the long term. That's because eBay's long-term potential is what ostensibly justifies its stock price, currently at $90.75, or about 81 times this year's projected earnings. For that share price to be worth a more normal valuation of 15 times earnings for retailers, eBay earnings per share must grow by 40% a year over the next five years.

"There's not a lot of room for errors," says one fund manager, who asked that his name not be used. "They've got to be picture-perfect for

that price to make sense."

Not Your Father's Dot-Com

Investors have been debating the proper valuation of eBay and other Internet companies for years now. But while other Internet companies saw their stocks hit rock bottom during the dot-com bust, eBay was able to keep its stock price up.

That's at least in part because eBay has continuously defied the skeptics. Unlike most of its Internet brethren, the company has repeatedly beaten expectations by posting nonstop revenue and earnings growth.

As Internet stocks have come back in vogue in recent months, investors have rewarded eBay handily. The company's shares are up 33.8% this year. Since April 2002, eBay shares have gained more than 66%.

eBay is now trading not only near its 52-week high of $91.41, but within sight of its all-time high of a split-adjusted $124.88, set back during the bubble in March 2000.

The run-up in eBay stock could find some support on Tuesday. On a GAAP basis, the company said in January that it expected to earn about 26 cents a share on about $440 million in revenue in the first quarter. In the year-ago quarter, eBay earned $47.6 million, or 17 cents a share, on $245.2 million in revenue.

Excluding stock-based compensation expenses and costs related to its acquisition of PayPal last year, the company projected it would earn about 30 cents a share in its just-completed quarter.

But Wall Street is expecting even better results. Excluding charges, analysts are projecting that eBay earned 31 cents a share on $456.62 million in the first quarter, according to Thomson Financial/First Call.

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Meeting or beating those results would be impressive, but some investors are wondering how long eBay can keep it up.

Much of eBay's growth in recent years has been fueled by its expansion into new categories and into various overseas markets. But some wonder what new categories the company has left and what it's doing to find and exploit new international markets.

Room to Grow?

"At some level, this growth monster has be fed with new categories and new countries," said a second fund manager, who also asked not to be named. "People have been amazed at the ability of this management team to deliver. But at some point, they're going to run out of planets."

Competition could also prove to be a threat. While





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have made few inroads into eBay's dominance, some investors may be scrutinizing eBay's report for indications about its market share and what it's doing to fend off competitors.

The first fund manager noted eBay's outsized gross margins and return on capital. "When you have that kind of returns, you're going to have other people try chip away at that," the fund manager said.

Another potentially destabilizing force could be a lawsuit slated for trial this week.

eBay has said the suit, which involves a patent dispute, could have a serious effect on its business and force it to change its method of operation. Although most patent disputes end in out-of-court settlements, no serious settlement talks are under way currently, according to a spokesman for MercExchange, the company that sued eBay.

Although he questioned whether the suit would have much effect on eBay, a third fund manager said that a negative result could rattle eBay's stock.

"This is a great company with limited upside," the fund manager said.