In separate reports issued this week, analysts at RBC Capital Markets and WR Hambrecht agree on one thing: Adoption by large, high-volume sellers unloading excess inventory and close-out products is key to eBay's growth.
But after that, their research leads them in opposite directions -- an upgrade to "buy -- analyst select list" for one, and a downgrade to underperform for the other. That's because one analyst sees signs that companies such as
may adopt eBay as a closeout merchandise channel, while the other says large sellers have found eBay to be a poor vehicle for moving significant volumes of any given item.
The difference of opinion reflects the difficulty Wall Street continues to have in assessing the prospects of Internet businesses, which -- for lack of easy comparisons with older companies -- don't have a life cycle that's easy to map. The stakes are high, since investors are betting that eBay won't stumble in its growth trajectory: The stock trades for around 46 times expected 2003 earnings, according to Thomson Financial/First Call.
Shares in eBay, down 27% from their 52-week high, traded at $52.89 Tuesday afternoon, up 8 cents for the day.
Optimistic about eBay's future among large sellers is WR Hambrecht analyst Derek Brown, who discussed the online auctioneer's prospects with large corporate sellers in a report issued Tuesday.
Brown's optimism stems from his attendance at a meeting held last week in Raleigh, N.C., by
, a privately held corporation that advises large firms on using the Internet as a customer acquisition and sales tool. At the meeting, Brown says he spoke with and heard from a number of large entities that appeared to be testing eBay as a channel for excess inventory, end-of-life product and refurbished merchandise. None, however, are selling more than $20 million of merchandise annually (a figure that's just a tiny fraction of eBay's $14.3 billion in gross merchandise sales).
But that doesn't faze Brown. "While no major news emerged from the event," he wrote, "we were left with the overwhelming sense that the big boys of business were moving eBay's way."
"Let there be no mistake," wrote Brown, "that these executives represented ... billions in potential gross merchandise sales and that they were in Raleigh to better understand eBay's marketplace and to learn how to more effectively use the platform for their businesses."
Brown, whose firm hasn't done underwriting for eBay, raised his rating on the stock from buy to "buy -- analyst select list," implying at least a 15% move upward within two months, according to WR Hambrecht's explanation of its ratings. Brown has a 12-month price target of $75 on the stock.
Meanwhile, RBC Capital Markets analyst George Sutton lowered his eBay price target Monday from $70 to $45 and dropped the company to underperform, partly because of a wildly different assessment of eBay's acceptance among the same potential sellers. RBC hasn't been an underwriter for eBay.
Saying that he has spoken with large sellers of corporate inventories and liquidations, Sutton says, "What these sellers have found, particularly recently, is that eBay does not operate well as a vehicle to sell large volumes of the same product." In fact, says Sutton, "Some have found that the demand eBay could create through auctions pales in comparison with the amount of product that could be made available."
Helping somewhat, says Sutton, is eBay's "Buy It Now" feature, which enables buyers and sellers to skip the auction process if a buyer is willing to meet a certain fixed price.
But in certain key areas, supply is far exceeding demand, says Sutton. "The increased supply has created multiple scenarios of too many sellers of the same generic item, which limits the prices paid and the volume sold." There's nothing wrong with eBay being a market for collectibles and a showcase for a wide variety of products, he says. "It
a problem," he writes, "when investors are pricing in expectations that eBay will be a major retail alternative for a broad range of products, when sellers are telling us the demand may not yet be there."
Thus, Sutton says, he has to question "the now highly believed assumption" that eBay will continue its growth at an unabated rate of 40% in revenue and 45% on the bottom line annually over the next few years. Instead, Sutton says he expects the annual growth rate to fall to 25% over the next three years.
An eBay spokesman said the company's practice is to not comment on research reports. eBay, however, has been pitching itself in recent months as a liquidation outlet to businesspeople in numerous categories, including hardware, apparel and computers.