Lehman knocks eBay: Trouble ahead?

In a report titled "The good, the bad, and the ugly," Becker said "the company would need to blow away 2001 estimates to outperform from its current level."

"Given our concerns about a slowing core business, a dependence on acquisitions for growth and various execution risks associated with new initiatives, we view this as unlikely," she wrote. "And given that eBay is no longer a takeover target--an insurance measure if times get tough--we suggest investors stay on the sidelines."

eBay shares closed down $5.13 to $34. In the past year they have traded in a range of $127.50 to $26.75.

Becker made a splash last year when she was one of the first analysts to change her mind about Amazon.com, saying she was "throwing in the towel" on the stock.

She was somewhat kinder to eBay, noting that there wasn't really an "ugly" side to its business.

Rather, it was the company's valuation that troubled her, particularly at a time when dot-com companies are seeing their values plunge.

eBay is trading at 119 times Lehman's 2001 earnings estimates, compared with 37 times estimates for AOL Time Warner.

"At $39 per share or $11 billion market cap, the company offers an unfavorable risk/return," she wrote. "With the multiples for other leading Internet companies continuing to contract--eBay's lofty valuation only gets richer."

Becker did praise certain aspects of the company's business--its profitable business model, strong brand name, low customer acquisition costs, and critical mass of buyers and sellers--but added that all these factors have been in place since the company went public.

eBay did manage to best analysts' expectations in the fourth quarter, posting pro forma net income of $25 million, or 9 cents per share, on sales of $134 million. And while that marked an 81 percent increase in revenue, analysts were concerned even then about slowing growth.

eBay had set a goal of reaching $3 billion in sales by 2005, a target that will be difficult to reach given the current market. And much of that growth will have to come from new businesses, since the company is only predicting that 15 percent of that revenue will come from collectibles.

"So where will the new growth be coming from?" Becker asked. "In effect, the company will need to simultaneously build four or five multihundred-million-dollar businesses over the next five years! Clearly this will not be easy--especially given the complexities in each of these new business segments."

eBay executives were not immediately available for comment.

eBay's ambition to become a "Wal-Mart of the Web," a place where people can buy and sell anything, anywhere, could also cause trouble, Becker wrote. The growth could dilute management resources and the core brand, and ultimately put pressure on margins as it hires staff and bulks up IT spending.

"To us, this is frighteningly similar to Amazon and Priceline--both of which found traction outside of their core business disappointingly slow and a drain on resources," she wrote.

Some of that expansion has come through acquisitions--eBay has purchased three companies over the past nine months, including Half.com, Korean auction site Internet Auction Co. and French site iBazaar.

Becker said the company "may struggle to integrate and monetize each of these companies given its poor record in previous acquisitions," pointing out that acquisitions of Butterfields and Kruse International are still not profitable.