Shares of eBay tumbled 13
percent Friday after Lehman Brothers analyst Holly Becker issued a pessimistic report on the online auction company.
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
"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
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
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
"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.