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HolidayBuyer's Guide
Tech Industry

2HRS2GO: Internet bear hits eBay

COMMENTARY -- Lehman Bros. has spoken: eBay (Nasdaq: EBAY) is too ambitious.

Shares of eBay plunged more than 20 percent today after Lehman analyst Holly Becker downgraded the online auctioneer to neutral from buy. The mere fact that the stock reeled after a single analyst opinion helps prove her point.

You'd hardly be more bearish than Becker if you crawled into a cave and went to sleep for the winter.

According to the First Call system -- where "1" is a buy and "3" is a hold -- Becker doesn't have a solid "buy" recommendation on any of the eight stocks on her list. Becker's best rating is a 1.5 for America Online (NYSE: AOL), which she started with an "outperform" in June.

She raised hackles in July after "throwing in the towel" on Amazon.com (Nasdaq: AMZN), and Yahoo! (Nasdaq: YHOO) stock never recovered from her "neutral" downgrade in late August. On the First Call system, Becker's Amazon.com and Yahoo! ratings are 2.3 and 1.8, respectively.

Among the other companies she covers, Priceline (Nasdaq: PCLN) is a 3, Drugstore.com (Nasdaq: DSCM) a 1.8, eToys (Nasdaq: ETYS) a 2.6 and Hollywood.com (Nasdaq: HOLL) a 2. I can't disagree with her general sentiments -- that's a pretty sorry list of stocks.

And if you listened to Becker for most of this year, you saved yourself a lot of financial heartache. Maybe that's why so many investors took her advice this morning and fled eBay.

Becker's latest argument is straightforward.

In her view, eBay became a dangerously priced stock after the company targeted 50 percent annual growth over the next five years. The analyst believes that revenue goal rests on an uncertain foundation of estimates about the total size of eBay's target markets and assertions about the company's penetration ability.

"Clearly, this type of top-down calculation is full of macro assumptions and has wide ranges of potential outcomes," Becker writes in her First Call note.

She points out that eBay's growth is already slowing even though the company, by its own estimate, has less than 2 percent of the U.S. collectible market.

"So how deep can eBay penetrate?" she asks. "Is 10 percent, the right goal, or is it 20 percent? Further, these objectives hinge on eBay`s ability to transform its business model from an auction-based, collectible site to a diversified e-commerce portal. ... So far, we have seen little evidence that that the model can travel."

That's the upside. At the other end, eBay stock so far has protected from a large decline because investors have continue to view it as a potential takeover target. But with the two most likely acquirers -- AOL and Yahoo! -- suffering from their own stock declines, an eBay acquisition now seems out of the question, Becker says.

All told, Becker's eBay skepticism is grounded in the same thinking that has many people questioning Amazon.com and Priceline: is the business model as extendable as the company asserts?

Until now, few people have raised that question with eBay because the company has been profitable since the day it went public. We can be reasonably certain that eBay will not be going out of business anytime soon.

But, like all prominent Internet stocks, eBay is priced not merely for survival, but massive growth. As YHOO, AOL and AMZN have retreated, EBAY's relatively stable performance makes the disparity even wider, even though eBAy's core business appears to be slowing.

Going into today, eBay traded at more than 114 times estimated 2001 earnings, compared to forward P-Es of 95.5 for Yahoo! and 67.2 times for AOL, although the latter two are more profitable than the former.

None of that would matter if investors had a solid belief in eBay; ultimately, performance isn't about fundmentals, but psychology. But shareholders clearly weren't all that confident to begin with, or the Lehman note wouldn't have demolished the stock today.

Think of it as inevitable. If it weren't Lehman, then something else would have snagged eBay, because at some point, the market hauls in any company. 22GO>