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ANALYST WATCH: eBay creates its own hype

eBay boldly predicted 50 percent sales growth for the next five years during its analyst conference this week. That was enough to push its shares up 17 percent Wednesday but the stock came back to earth after several analysts issued a more cautious outlook.

On Wednesday, eBay (Nasdaq: EBAY) told analysts to expect sales in excess of $3 billion by 2005, saying its online auction market will grow from $1.6 trillion to $2 trillion over that period.

It also said it would record gross profit margins in the mid 80 percent range and operating margins between 30 percent to 35 percent.

At first glance, it would be easy to understand why investors were so jazzed by eBay's outlook.

In fiscal 1999, it posted total sales of $224.7 million, up 161 percent from $86.1 million in 1998.

But some analysts weren't as optimistic.

CS First Boston analyst Heath Terry cut eBay from a "strong buy" rating to a "buy" and set a 12-month price target of $90 a share.

WR Hambrecht's Derek Brown, who cut the stock from a "strong buy" to a "buy" in June, said that while the tone of the analyst meeting was "upbeat," "little new information" was actually revealed.

Brown said the company's $3 billion revenue goal "was an extremely bullish signal, and an indication that our current 2000, 2001, and 2002 estimates are likely conservative."

"On the other hand, we think this target may ultimately prove too aggressive, as it implies the Herculean feat of revenue growth of nearly 50 percent per year for the next five years," he wrote in a research note.

It's amusing that Brown would say that "little new information" was unveiled during the meeting and yet Banc of America Securities analyst Tom Courtney said eBay "provided newly articulated long- term goals, with specific financial information."

Banc of America Securities went on to raise its 12-month price target to $90 a share from $80 a share, but said that it "would not expect many sell-side analysts to raise estimates today, as management would like additional time to provide specific, detailed information for calendar 2001."

Chase H&Q didn't change its sales or earnings estimates nor did it upgrade eBay.

"Overall, eBay's competitive position has never been stronger, and we left with the belief that this management team has significantly strengthened and deepened over the past year," it said in a research note. "We are not changing our 2000 or 2001 forecasts at this time; however, we do believe that our estimates, particularly our 2001 projection of 34 percent top-line growth, are conservative with respect to speed of adoption in newer businesses."

Finally, Robertson Stephens Lauren Cooks Levitan maintained her "strong buy" rating on the stock following the meeting.

"We expect shares of eBay to continue reacting positively to the tone and content of this meeting and further expect eBay to disproportionately benefit from any renewed investor enthusiasm for the eConsumer sector in advance of the holiday season," she wrote in a research note. "We continue to view eBay as a ‘safe haven’ investment for investors in this volatile sector given their profitability, dominant market share, and clear opportunities for continued robust business momentum."

In its latest quarter, eBay earned $13.2 million, or 5 cents a share, on sales of $97.4 million.

First Call Corp. consensus expects it to earn 4 cents a share in its third quarter and 19 cents a share in the fiscal year.

Twenty-seven of the 30 analysts following the stock rate it either a "buy" or "strong buy."