dizzying ascent has Wall Street wondering once again how long the online auction giant can keep it up.
As much as they like the San Jose, Calif., company, few investors would have forecast this year's rally. Counting a
sharp spike this week that registered an all-time high, eBay has roared to an 88% gain for 2003. Now, with the stock trading at a superpremium multiple, few observers are forecasting that 2004 will bring outsize gains to shareholders.
And yet, with eBay remaining one of tech's only dependable growth plays, who's going to bet against it? So-called valuation shorts -- investors wagering on a stock's decline simply because its price-to-earnings multiple is high -- are willing to take the plunge, but they have taken sharp losses in recent months as the likes of eBay and
Research In Motion
continued to surge. So the debate rages on.
"eBay has a valuation that's not easy to justify based on its current earnings stream," concedes Mark Klee, who manages the JohnHancock Technology fund. But he says simple P/E ratios sometimes miss the point.
"I always believe you have to normalize the long-term growth prospects of these companies," says Klee, whose fund is long the stock. "eBay is one of those relatively unique companies that has the wherewithal to continue growing for quite a while."
On Wednesday, eBay closed at $64.02, up 28 cents.
eBay shares have vastly outperformed the market for 2003 and have even beaten their highflying Internet peers. But with the stock fetching more than 60 times next year's projected pro forma earnings -- earnings that don't include the cost of stock options or other noncash charges -- even Klee is looking for a relatively modest 15% gain next year.
Up, Up and Away
Some people are still more skeptical. "I don't know how you could put a foot in the water and say that's a good deal," says Jay Ferguson, a portfolio manager at Ferguson Andrews Investment Advisers, which has no stake in eBay. "We rarely if ever buy at the 52-week high. That's not a recipe that we follow."
Prices aside, though, the key issue for investors is trying to figure out when eBay's growth will drop off, says Matt Richards, a portfolio manager at Richards Asset Management.
Bulls note that the stock's 2003 rise has been fueled in part by the company's tremendous growth. In the first nine months of this year, eBay's earnings per share rose 79% from a year ago, while revenue jumped 90%.
Of course, that growth was boosted by the acquisition of PayPal in the fourth quarter last year. Although PayPal's results are included in eBay's reports this year, they weren't included in the first three quarters of last year.
If you assume that eBay revenue continues to grow at 50% a year for the next 10 years or so, you get to the point where the company would need to have nearly everyone in the U.S. running an auction on its site once a week, Richards says. That, of course, is a ludicrous assumption, he says.
By the same token, it seems unlikely that the company's rapid growth will slow tomorrow, he said.
"There should be some way to predict that, but I don't know what it is," concludes Richards, whose fund has no stake in eBay.
Klee contends that eBay will be able to continue its fast-paced growth for the foreseeable future. By offering more products in more markets, eBay will make its business less risky and steady the pace of its expansion, Klee says.
But even if eBay's expansion plans are less risky than before, that doesn't mean that its stock is similarly less risky, other investors say. With the company's valuation as high as it is, a mere change in sentiment could send its stock spiraling down -- as happened the last time eBay traded at these levels, in early 2000. That year the stock finished 74% below its high.
"If you see some downside momentum in the name, it's going to cut pretty hard," says Scott Rothbort, president of LakeView Asset Management and a contributor to
professional investing site,
"People are going to be running for the exits," says Rothbort, whose fund has no position in eBay. But he adds, "I don't see any evidence of that yet."