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INNOVATION
& DESIGN Home Page Architecture Brand Equity Auto Design Game Room SMALLBIZ Smart Answers Success Stories Today's Tip INVESTING Investing: Europe Annual Reports BW 50 S&P Picks & Pans Stock Screeners Free S&P Stock Report SCOREBOARDS Hot Growth 100 Mutual Funds Info Tech 100 S&P 500 B-SCHOOLS Undergrad Programs MBA Blogs MBA Profiles MBA Rankings Who's Hiring Grads | | JANUARY 11, 2001 STREET WISE By Amey Stone eBay: Bidding for Web Domination Amid the dot-com carnage, the auction giant is flourishing -- and moving to strengthen its competitive position
On Jan. 8, eBay announced it was buying a majority stake in South Korea's largest auction site, Internet Auction, for $120 million in cash. With Korea being the sixth-largest Internet market in the world, analysts expect the deal to give eBay a new foothold in Asia (it already has a site in Japan). eBay plans to enter 10 new foreign markets by the end of 2001. With auction growth in the U.S. slowing, analysts have high hopes that eBay's international expansion plans will be a major engine of future growth. Then on Jan. 10, Yahoo! (YHOO) began charging for its auctions, which formerly had been free. It will still charge less than eBay, but Merrill Lynch analyst Henry Blodget wrote in a Jan. 3 note, when the plan to charge fees was announced: "Many sellers on Yahoo! auctions will likely pack their bags and hoof it over to eBay or Amazon when fees are added." It appears that Amazon.com's and Yahoo's plans to encroach on eBay's auction turf aren't worth fretting about these days. OPPORTUNISTIC. Granted, these aren't blockbuster developments. But the larger picture is that eBay is on track to be one of the few Web companies to tangibly benefit from the dot-com meltdown. While all stocks fall during a industrywide shakeout -- and eBay, now trading at $39 a share from a March, 2000, high of $128, is no exception -- the strongest companies use the downturn as an opportunity. They drive out competition and buy up key players. Then, when the industry rebounds, they emerge into a less competitive environment operating from a position of strength. It might take another year, or even two, for this rosy scenario to play out, and in this uneasy market, a steep rise in eBay's shares doesn't really seem to be in the cards near-term. Still, there could be some decent short-term appreciation. On a good day for the Nasdaq on Jan. 10, eBay's stock price rose 18% -- despite the lack of any specific news about the company. Investors do seem to be taking some notice of how the company is faring in a harsh dot-com landscape. eBay benefited from a surprisingly strong surge in traffic in December. According to Media Metrix, average daily unique visitors to the site jumped nearly 60% during the 2000 holiday shopping season, to 2.5 million from 1.6 million for the same period in 1999. "We were surprised and impressed to see such strong traffic growth leading up to the holiday season," says Greg Kyle, president of Internet stock research firm Pegasus Research, who noted that consumers are apparently used eBay to shop for gifts. DOWNTURN HAVEN. January could prove an especially strong month for eBay's business, believes Derek Brown, an analyst with W.R. Hambrecht & Co., who rates eBay his top mid-cap pick. eBay typically benefits from an increase in auction listings in January. But with its first nationwide television ad campaign -- estimated at $3 million -- launched in December and with Yahoo's new fees, "I think it could see an unusually strong January effect this year," he says. He also thinks eBay could emerge as a haven in tougher economic times since consumers would be more likely to turn to it -- both as a way to find bargains and to generate extra cash selling items they don't need. Meanwhile, eBay's fourth-quarter earnings, due out Jan. 18, will likely provide fresh evidence of its strengthening position. Analysts expect the company, which unlike the vast majority of dot-coms has consistently operated in the black, to continue its practice of beating estimates for the quarter. According to research firm First Call, consensus estimates are for fourth-quarter earnings per share of 7 cents, up from 2 cents a year ago. Revenue is expected to come in at around $125 million, up from $74 million the same quarter in 1999. None of this is to say eBay, which is at root a service business, doesn't have issues it needs to address if it's going to nurture the loyalty of its customer base. So far in January, it has been hit with a major site outage as well as privacy concerns. In an effort to repair a programming bug, the company erased millions of customers' effort to "opt out" of receiving marketing pitches. More important, auction growth rates have understandably slowed from torrid pace in 1998 and 1999. BLOOMIES TIE. Given the steep slide in eBay shares, analysts say investors have factored in worries about declining growth rates. Yet the stock remains one of the most expensive Internet names. It is trading at 20 times revenue from the prior 12 months, while Yahoo is trading at 15 times revenue, says Kyle. The average e-tailing stock trades at just 2.3 times 12-month sales, he says. But "it is getting more reasonable," says Faye Landes, an analyst with Sanford C. Bernstein who triggered a slide in eBay's shares last summer after issuing a report questioning its valuation in light of growth prospects in its core business. eBay is also taking steps to address other issues that concern Wall Street. Since online auction shopping may not be for everyone, it acquired fast-growing, fixed-price shopping site Half.com last July. Expansion into high-growth international markets is a top priority. eBay is promising to crack down on sellers who avoid paying fees by locating buyers on eBay and then making deals outside the system. And it's having success branching out of its usual "collectibles" market into high-price automobiles and brand-name items, such as a link to Bloomingdale's goods on its clothing site. eBay is also diversifying revenue by offering a new program interface that will allow other businesses to link to eBay's network. But it's eBay's core auction model that makes its business work so well on the Web. In a virtuous cycle, the critical mass created by the millions of shoppers and sellers that use the site helps attract more buyers and sellers. This "many-to-many" business model also avoids the biggest problem Web pure plays face these days -- going head-to-head with established bricks-and-mortar businesses that are launching online initiatives. Although high-end art auction houses like Sotheby's and Christies' have dot-com arms (and eBay hopes to do more high-end business), the reputation and expertise of these well known companies, plus the cachet of attending the live auction, are huge draws for high-end buyers, Landes says. "The model [eBay] has created is ideally suited to the Internet," says Brown. "It has very high margin revenue streams, no inventory, very little infrastructure, and its business is almost infinitely scalable." He expects sales to grow to $619 million in 2001, up from $420 million in 2000. While other Web companies are struggling, "eBay has no operational obstacles that I know of," says Landes. "I continue to think eBay does an amazing job of fulfilling the promise of the Web in terms of virtuality," she says. "That is not a small deal. It is a big deal." Especially in the new dot-com wasteland, where a viable and growing business is rarer than ever.  Stone is an associate editor for Business Week Online Edited by Beth Belton  | | |
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