|
But for battered Net investors, a slowing growth rate and scaled-back earnings estimates can't be ignored. They may not have caused eBay's 50% drop from its late-March highs (blame a sectorwide meltdown sparked by rising interest rates for that), but those factors are certainly holding the stock back now. In a June 16 research note, Merrill Lynch pointed out rather starkly that eBay is transforming itself into a "long-term growth company from a hyper-growth company." It warned investors not to expect a blowout second quarter when the company reports in late July, but rather for it to merely meet expectations. "This may come as a surprise to some investors, as eBay has often beaten expectations easily," Merrill analysts wrote. The stock fell three points that day and stayed there, closing on June 21 at 61 3/4, down 9/16. Longer-term investors, however, may want to turn their attention to something other than the next quarter's earnings. A recent acquisition may give eBay's long-term growth rate the booster shot it needs. YIN AND YANG. On June 13, eBay announced it's acquiring Half.com, a person-to-person trading site, but one where commodity items like CDs and books are offered at fixed prices (usually half of list), rather than auctioned off. The deal should dramatically increase eBay's market. On one level, its quick-and-easy, fixed-price format is better suited than auctions for sales of CDs, books, and videos, items that have much bigger markets than collectibles. It should also draw customers to eBay who don't like the auction format, says Jeff Jordan, senior vice-president and general manager of eBay U.S. and architect of the Half.com deal. "Some people love auctions, some are less enamored of them," he acknowledges. (Indeed. I've never participated in an online auction and was ready to make four or five purchases after a quick visit to Half.com.) Most important, Half.com is growing like a weed. From its launch just five months ago, it's already the 25th-largest online shopping site, according to Media Metrix. In May, unique users grew nearly 40% over the prior month, to 2.6 million. Together, eBay and Half.com would be the No. 1 shopping site for May, ahead of Amazon.com and BlueMountain Arts, notes Robertson Stephens analyst Lauren Cooks Levitan, who upgraded eBay to "strong buy" on news of the acquisition. Some analysts have questioned the price eBay will pay -- about $375 million in stock. But, says Jordan: "This struck us as prudent spending, to put rocket fuel into the company." While Levitan loves the deal, calling Half.com the "yin to eBay's yang," the rest of the investing pack has hardly followed her lead. eBay's stock fell 6% following news of the acquisition. Part of the problem is confusion, since Half.com is not in the auction business and seems to be yet another book and CD e-tailer. The deal also doesn't seem in line with eBay's stated growth strategy, which lately has emphasized international expansion and wireless deals. But the main problem for investors is that the acquisition will cut into eBay's earnings for the next several quarters. Analysts estimate that Half.com is generating losses of about $8 million per quarter in 2000 and won't add to eBay's earnings until the first quarter of 2001. About a third of the analysts who cover eBay have already cut their earnings estimates, while some are waiting for the deal to close to do so. SLOW SEASON. "The company has taken a fairly dramatic step in making an acquisition of a company outside of the auction space," says Levitan. But she notes all the similarities: Both companies share the same business model, where by never taking control of inventory, they earn high-margin transaction-fee income. Half.com uses the same community feedback tools but has an easier payment system , which is exclusively via credit card. "I do think the investment community is underestimating the potential," Levitan says. Merrill, two days before it put out its stock-dampening June 16 earnings preview, predicted in a research note that "there will be at least as many users of the fixed-price format as of the auction format." If that's true, eBay's earnings will get a strong boost from Half.com, starting in 2001. As for next quarter, it may not be that exciting. Merrill continues to give eBay its highest rating and has a $100 price target, but it notes that in the slow summer season, there may not be any catalysts to propel the stock. Such an uptick may have to wait until the end of the year. But for Levitan, the underestimated Half.com acquisition coupled with a seasonal slowdown makes this an ideal time to buy eBay. "Any Internet investor who doesn't have a longer-term perspective than the next quarter is kidding themselves," she says. With eBay perhaps the only consumer e-commerce company turning a profit right now, that's something to keep in mind. Stone writes about the markets for Business Week Online What's your take on eBay? Let us know at our Ask Amey Stone Forum EDITED BY DOUGLAS HARBRECHT |
