eBay ( EBAY) CEO Meg Whitman likes to mention "the Power of Three" when talking about her company. It's a reference to the combined might of eBay's auction business, the PayPal payment service and Skype's popular Internet telephony service. It must be frustrating, then, to have investors hone in on the weakness of one thing or another -- whether it be eBay's decreasing core auction business, recent listing lags in Germany or setbacks in China -- instead of the promise of the overall vision. Despite a holiday season that saw a record number of online shoppers and a continued strong showing for PayPal, which
continues to dominate its market and contribute ever more to eBay's bottom line -- even as Google ( GOOG) redoubles its efforts to promote its rival Checkout service -- investors could not seem to stay behind the stock in its fourth quarter. eBay heads into that quarter's earnings Wednesday down roughly 11% to $28.62 since announcing its third-quarter results. That decrease is in contrast to the gains posted over the same period by other big Internet names such as Yahoo! ( YHOO), Google and Amazon ( AMZN). Trading at about 24 times forward earnings, eBay seems cheap when compared with others in the Internet sector, especially considering that the San Jose, Calif.-based company owns three of the top online consumer brands and that the migration of customers to the Web continues unabated.
Analysts surveyed by Thomson Financial forecast eBay to earn 28 cents a share on $1.67 billion in revenue. eBay estimates earnings of 27 cents to 28 cents a share on revenue of $1.62 billion to $1.68 billion. For the full year, analysts forecast earnings of $1.02 a share on $5.9 billion in sales, in line with the company's forecast of earnings of $1.01 to $1.02 a share on revenue of $5.87 billion to $5.93 billion.
voiced concerns about eBay's pace of listings growth. Though revenues per listing may have edged up slightly and this will likely be another strong quarter for PayPal, Cantor Fitzgerald analyst Derek Brown believes that eBay's main business is simply past its prime. "We think operating metrics from 4Q 2006 results will show further signs of 'platform fatigue' in the company's core marketplace business," Brown wrote in a research note Friday. Cantor Fitzgerald has or seeks investment banking relationships with eBay. Another major concern, eBay's pursuit of high-growth international markets, also gave investors a new development to mull over in the quarter: The company announced it would shutter its solo China Web site in favor of playing minority partner to local player Tom Online.
The change of direction is a black eye for eBay, but it may also represent a sober decision and put the company on surer footing in the ultracompetitive Chinese market, where having a local partner is especially valuable. Investors will also look for eBay to elaborate on the $310 million
acquisition in January of StubHub, the largest online vendor that resells events tickets. The logic behind the deal is much more straightforward than the $2.6 billion eBay shelled out for Skype in 2005. That acquisition was intended to help eBay reinvigorate growth in its core business by making it easer for buyers and sellers to communicate through Skype's phone service. Unlike StubHub, which fits in easily with eBay's auction services, Skype was one step removed from the company's business, and the jury is still out on the benefits of the deal. Still, eBay reportedly had the chance to pick up StubHub for a mere $20 million in 2002, before the deal fell apart because of a dispute in price. The much larger price tag keeps the move from being an unmitigated success for eBay and opens doors for a new set of questions. Investors will also look for progress reports on eBay Express, in what amounts to the first holiday season for the quick, fixed-price shopping service.
But nothing illustrates the ambivalence of investors toward the stock than eBay's latest fee hike at the beginning of the year in what has become routine at eBay. At first, shares rallied as investors saw this as a sign that eBay retained its pricing power and that the company was healthy enough to avoid cutting fees to boost listings.
The stock, however, promptly gave back its gains as Wall Street worried about whether the higher listing fees would be passed onto buyers, thereby further depressing activity. In Wednesday's report to investors, the company will likely again trot out impressive figures about the number of countries PayPal now operates in or how many millions more users adopted the Skype service. The Power of Three aside, investors will want concrete measures to overcome eBay's one big headache before getting behind the company's stock.