Updated from 9:08 a.m. ESTOh, no. A giant has stumbled. And investors are scrambling to get out of the way. eBay ( EBAY), the online auction colossus that seemed to do everything right, posted fourth-quarter earnings that came in below what analysts were so confidently expecting. eBay posted a consolidated net income of $205.4 million, or 30 cents a share. The good news: That was 41% higher than its profit in the year-ago quarter. (eBay's pro forma profit of 33 cents a share, which includes newly acquired operations such as Rent.com, rose 38%.) The bad -- surprisingly bad -- news: Analysts polled by Thomson First Call had expected 34 cents a share. eBay's shares were sharply lower Thursday morning at $86.46 after closing Wednesday's regular session at $103.05. At that level, the stock is 18% below its price at the close of regular trading on Tuesday. eBay's numbers are coming at an awkward time. The market was already jittery during Wednesday's trading session when better-than-expected earnings reports from the likes of Yahoo! ( YHOO), Motorola ( MOT) and IBM ( IBM) failed to ignite a broader rally. And then eBay's stock was languishing amid
More disconcerting to investors was that the company's outlook for the first quarter and current fiscal year also fell short of Wall Street estimates. In October, eBay said its 2005 earnings "could be as high as $1.42." On Wednesday, it revised its guidance "to fall in the range of $1.37 and $1.41." Guidance for the first quarter was tweaked down from "as high as" 34 cents a share to "in the range of" 32 cents and 33 cents.eBay, however, raised its guidance for revenue to be as high as $4.35 billion from a previous projection of $4.2 billion. Similarly, it sees first-quarter revenue as high as $1.03 billion, up from its earlier guidance of $1.02 billion. On the face of it, this is the earnings report of a remarkably healthy company. Few companies with a decade of history and several billions in revenue are still growing more than 50% a year. In 2004, eBay's revenue grew 51% to $3.27 billion and its profit grew to $1.14 a share from 67 cents a share, an impressive 70% growth. But look hard at eBay's youthful visage and you'll notice crow's feet developing around the eyes. Revenue growth in the fourth quarter, at 44%, was slower than the annual growth rate. Meanwhile, eBay's cost of revenue grew 53% in the quarter, and its sales and marketing costs grew 56%. The slowing growth cuts across all of eBay's major revenue lines: U.S. transaction revenue grew 24% in the fourth quarter, down from the 38% in the year-ago quarter. Similarly, the rate slowed to 64% from 96% in international transactions and to 53% from 68% in payments revenue. Now, it's normal for growth rates to slow as a company grows, and yes, those rates are impressive in themselves. But couple the slowing with the increase in operating costs and it raises some questions. "It may be that the years of relatively easy growth are behind the company," says Derek Brown, an analyst at Pacific Growth Equities. Brown pointed to two figures in the report that raise some concern: eBay's gross merchandise volume -- the total amount of goods traded through eBay -- as well as the number of new listings. Both gained by 39% in the fourth quarter. "That's the first time in the company's history that either of those numbers has been below 40%," says Brown. "Despite being in more territories and having a bigger marketing budget, they're seeing some level of saturation in their existing markets."