With apologies to
De La Soul
, 3 billion isn't a magic number.
got a nice pop after the company set a 2005 revenue goal of $3 billion at its recent analyst meeting. Setting such a concrete (not to mention ambitious) goal seemed to cement eBay as the favorite of investors who want growth, e-commerce style, but are sick and tired of the kind of disappointments recently handed to them by
But eBay's shares are now trading below where they were before the meeting, showing that no matter how great the future looks, investors want to see progress before they pay up for a stock that still trades at 729 times trailing earnings.
"I really want to see them penetrate these new markets, and they gave very little information on how they're doing in those," says Faye Landes, analyst with
. (She rates eBay a market perform -- equivalent to a hold rating -- on valuation alone.)
Why the heck would a company even stick its neck out with a projection like that? To play with the big boys. Other successful companies, like
, are very explicit about "what the hill is and how are we going to climb it," says Rajiv Dutta, eBay's head of investor relations. While Wall Street has nary a bad word to say about eBay's execution, there are always nagging questions about whether it can make a big enough push beyond
and used skis to justify its stock price. eBay and its supporters, of course, think there's quite a large opportunity out there, thanks to new initiatives.
At the meeting, eBay's chief operating officer, Brian Swette, crunched the numbers on some of those top-down assumptions. Here's how he figures things: eBay estimates the collectibles, mass market goods, used car and auto parts, and computer markets total just over $1.6 trillion today and assumes that will grow 4% annually, which brings us to $2 trillion by 2005. Then he figures about 10%, or $200 billion, of that will move online and that eBay can grab as much as 20% of that, or $40 billion. That's the sum total of all the goods eBay thinks it can sell. If eBay can maintain or improve its ability to generate revenue totaling 7% to 7.5% of gross merchandise sales, then presto! -- it's at $3 billion. (That doesn't include any new initiatives the company might launch.)
It all rolls off the tongue pretty smoothly, but step back a minute: Right now, analysts estimate revenue will come in at about $415 million this year. So reaching the goal implies an average 50% compound annual growth rate in 2001-2005. (That's only an average; individual years may show higher or lower growth rates.) Granted, eBay is expected to show growth in excess of 80% this year, but the law of large numbers says that 50% average growth for five years is a pretty impressive hill to climb. And who the heck knows what the online landscape will look like in five years, anyway? The company is asking investors to take a big leap of faith.
eBay tends to get the benefit of the doubt because it's not known for making promises that it can't keep. In fact, at a recent investment conference, CFO Gary Bengier pointedly
whipped out an old roadshow presentation to demonstrate that the company makes good on its promises.
But past performance notwithstanding, a lot is riding on eBay's ability to reduce its dependence on collectibles (now about 25% of listings) and to push ahead in new markets, specifically in new autos and fixed-price sales (a market it got into with its purchase of
), and continue its success internationally. "I don't question the size of their market opportunity," says Genni Combes, a former analyst with
. (She was interviewed before leaving the firm.) "But it's a question of how quickly consumers adopt to the dynamic pricing model." (She rated eBay shares a buy, and the firm hasn't done underwriting for the company.)
Half.com -- which matches sellers willing to part with books, music, video and games for a fixed price of at least 50% off and buyers wanting the stuff -- may be a great idea, but it has got to catch on the way eBay's auction business has. Autos are coming on strong, says Combes, but they've got to continue to grow. eBay has to continue to dominate the markets in Germany and the U.K. and to grab the same kind of success in new areas like its recently announced French operations. "All eyes are on the growth in these three businesses," she says.
eBay didn't go into detail on how many users it expects to get, how active those users will be and what kind of fees it will generate per user; nor did it give earnings guidance besides repeating its commitment to 30% to 35% operating margins. eBay's Dutta says the company wanted to present an overall vision, not a microanalysis -- and leave itself room to shift resources from market to market, depending on what's working. And with the quarter ending, they didn't want to preannounce, he says.
But this ambitious -- and public -- goal-setting strategy is not without pressure. When companies with pricey stocks don't deliver, the results resemble a particularly vile patch of roadkill. Just ask priceline, which has seen its stock get hammered after it warned about third-quarter revenues and its WebHouse licensee said it would shut down. Or Amazon, which earlier this year saw its own stock pummeled when sequential revenue growth slowed. eBay is seriously pricey -- even pricier than its role model Cisco, which trades at 156 times trailing earnings.
And ironically, now that the $3 billion number is out there, the chatter about surpassing that goal has begun. "Half.com could be bigger than the auction business, and so estimates could actually be low," says Adria Markus, analyst with
. (Her firm doesn't have ratings, and it hasn't done underwriting for eBay.) "They obviously think that while this is a high bar, it's one they can reach."
eBay can set all the bars it wants. But to see its stock continue to rise, it has got to continue to do what has made it the favorite of the consumer e-commerce investor: overdeliver. That's the real magic word.