SAN FRANCISCO - Investors punished
on Thursday for providing unchanged guidance for the second half of the year while failing to convince them that its new initiatives will help improve the business anytime soon.
Shares of eBay plummeted 14.5% to $24.04 on the day after the online auction giant reported second-quarter results, which came in above Wall Street expectations. eBay also raised its guidance for the full year but only enough to account for its second quarter's performance, leaving its forecast for the rest of the year unchanged.
The company further disappointed investors by showing only a modest growth in gross merchandise volume, or the total value of items sold on the site, which climbed 8% in the second quarter largely due to favorable foreign exchange. It also experienced an 8% decline in sales conversion rates and a 6% decline in average selling prices.
Analyst Douglas Anmuth of Lehman Brothers lowered his price target for eBay to $31 from $33 after noting that eBay's latest initiatives to improve performance -- including coupons to buyers in order to maintain customer loyalty, discounts to sellers who improve their ratings, and a revised structure for listing fees -- would likely have a net negative impact on revenue collected by the company through commissions for the next several quarters.
"In addition, foreign exchange comparisons should get more difficult in the fourth quarter of 2008," Anmuth said.
Analyst Jeffrey Lindsay characterized eBay's second quarter as "good but no cigar."
"We think management is following an overly cautious game plan of incremental beats and raises, resulting in tepid guidance that is insufficiently reassuring in the current macro-environment," Lindsay wrote in his report.
He noted that eBay has fallen behind on customer service and platform capabilities, resulting in decelerating growth of its main selling platform.
"Although eBay management has added on related businesses such as Shopping.com and StubHub and ancillary revenue-generating activities such as internet advertising to maintain growth, investors will likely remain unconvinced about eBay's future potential until it demonstrates renewed growth in the core marketplaces business," he said.
Nonetheless, Lindsay remained upbeat on the company, maintaining his outperform rating and a price target of $38.
"We believe that eBay has retained its long-standing advantages of very broad selection and low prices even over high-performing competitors such as
," he wrote.
eBay Chief Executive John Donahoe, who took over the company on March 31, has been pushing for improvements to the site, and on Wednesday's conference call with analysts he acknowledged that the company faces a short-term risk in order to build long-term reward.
He also emphasized its decreasing dependency on eBay's marketplace business, although it still makes up 57% of the company's total revenue. Business like PayPal and Skype are starting to make a bigger difference. In the second quarter, PayPal's revenue grew by 33% while Skype's grew by 51%.
But Jeetil Patel, an analyst for Deutsche Bank, who has a sell rating on eBay, wondered what more the company could do to improve the business when even now its initiatives seem to have limited effect.
"If eBay cannot control product average selling prices (as retailers do to manage growth) yet the company is raising fees on its sellers and issuing coupons (to drive consumer purchases), then what control does eBay have in sustainably managing its business and building barriers to entry longer term, irrespective of a normal or challenging economy, or an intensely competitive environment?" he wrote. "In other words, the levers available to eBay may be increasingly limited, especially in the current environment."