The Rearview Mirror for eBay's Autos Issue - TheStreet


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stock took a tumble on Monday after a downgrade. But with the company expected to meet or beat earnings estimates on Thursday, don't expect its shares to stay down for long.

Saying that growth in revenue from eBay's automotive site could fall short of expectations, Citigroup Smith Barney analyst Lanny Baker

hit the company with a sell rating on Monday. Following his report, the company's shares fell $1.47, or 2.4%, to close regular trading at $58.99.

Despite the stock's tumble, other analysts thought Baker's conclusion was suspect. eBay shares won't stay down for long, no matter what's going on with its automotive site, they said.

"There's still too much momentum in

the Internet names," said Gary Farber, a partner with hedge fund Nightingale & Farber. "At some point in time, price will matter, but it doesn't matter when stocks are making their numbers and are going higher."

Great Expectations

eBay's shares have consistently shrugged off bad news and skeptics to rise 78% since the beginning of the year. While that's not as big a percentage gain as other Internet names, such as





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, eBay's stock never dropped as much as those of its online rivals.

Meanwhile, eBay's shares are now back near their all-time high set at the height of the dot-com boom. And the company is trading at 56.2 times its projected 2004 pro forma earnings, which don't include noncash charges or the expense of stock options.

eBay's financial performance this year has given investors an excuse to bid up the stock. Through the first six months of the year, the online auction company's revenues are

up 92.3% from the first half of last year. Meanwhile, the company's earnings per share are up 67%.

Those numbers were inflated by the performance of PayPal, which eBay acquired in the second half of last year, and by the decline of the dollar vs. other currencies, which has boosted the dollar value of the company's overseas transactions. Meanwhile, the numbers don't include the

cost of stock options, a significant expense that eBay has refused to include on its income statement.

But while the numbers aren't as good as they first appear, they're still impressive and have put eBay well on its way to making its goal of reaching $3 billion in revenue by 2005.

Wall Street expects eBay's strong performance will continue in the third quarter. The company projected it would earn 14.5 cents a share, on a split-adjusted basis, and 17 cents a share excluding noncash charges and gains, on $515 million in sales in the quarter. (eBay completed a 2-for-1 stock split in August.)

But analysts surveyed by Thomson First Call are expecting the auction company to post pro forma earnings of 18 cents a share on sales of $518.58 million.

Similarly, analysts believe the company's fourth-quarter guidance is a bit conservative. eBay has projected that it will earn 18 cents a share -- 20 cents a share excluding charges --on $575 million in the fourth quarter. Analysts, meanwhile, are calling for pro forma earnings of 21 cents a share on $585.7 million in the quarter, according to Thomson First Call.

To be sure, eBay continues to have some skeptics. And you can now count Baker among them.

Car Talk

In his report, Baker notes that sales through eBay Motors, the company's automotive site, now account for 28% of the value of all the goods sold through eBay's Web sites, which the company calls its "gross merchandise sales."

Some 35% to 40% of the growth in eBay's overall gross merchandise sales in the last two years has come from increasing sales through the Motors site. The site's success has become a big part of investors' future growth expectations for eBay, Baker writes.

But eBay Motors' continued success is not assured, Baker argues. About 30% of used car dealers in the U.S. are currently offering vehicles on the automotive site, according to Baker's research. But an even greater portion -- 40% -- has found eBay Motors wanting after either trying or evaluating it.

The research indicates that due to pricing problems or the complexity of the service, eBay may have trouble growing listings -- and revenue -- on its automotive site, Baker says.

"Should the 90% to 100%-plus growth rates of eBay Motors'

gross merchandise sales come down into the 50% to 70% range, as we suspect they may by the end of 2003 and early 2004, we believe that the market may begin to assign somewhat lower valuation multiples to the business," Baker writes. "With eBay currently trading at 13 times next year's forecasted revenue, we believe that the chances of some valuation contraction due to a slowdown in the company's single-largest

product category are significant."

Baker's research complements that of J.D. Power & Associates. While eBay has gained market share in automobile listings over off-line rivals such as traditional classified ads, the company's automotive site is not the top online choice of dealers or shoppers, said Scott Weitzman, an analyst at J.D. Power. Dealers have had success selling high-end cars and some low-end cars on eBay, but the site is not as good for selling the bulk of used vehicles, he said.

"They don't have the mass marketplace that

AutoTrader or even provides," Weitzman said.

Interestingly, though, even Baker doubts that a slowdown in eBay Motors will have much effect on the company's bottom line, at least in the near term. And he writes that the potential slowdown will have only a marginal effect on the company's overall revenue or the value of the goods sold on its site.

Some analysts concur with Baker that eBay Motors is due for a slowdown. But as long as eBay is making its overall numbers, its stock is not likely to tumble in the near future, they say.

eBay Motors is unlikely to continue as a growth driver for eBay, said Scott Rothbort, president of Lakeview Asset Management and a contributor to's Street Insight

Web site. But eBay will make up for that with growth elsewhere, Rothbort said. And investors are likely to forget Baker's report as soon as the company reports earnings this week, he said.

"With all the money that's pouring into mutual funds, they're only going to take

the stock higher," Rothbort said. "Valuation shorts are getting killed in this market."

One buy-side analyst, who asked not to be named, said Baker's report was "academically" interesting. "It's something for everyone to keep in the backs of their minds," said the analyst, whose fund has no stake in eBay.

But, he added, the report is no reason to short eBay's stock.

"They're going to make numbers, and their Q4 numbers are conservative," the analyst said. "What am I, an idiot? It's a bull market."