Is eBay on Santa's List?


If eBay is any indication, this holiday season could be more of a nail-biter for e-commerce companies than most folks had expected. On the surface, you wouldn't think so: The online marketplace reported results on Oct. 19 that met analysts' third-quarter profit and sales expectations, hiking profits 40%, to $255 million, or 18 cents a share, as sales jumped 37%, to $1.11 billion. eBay (EBAY) even upped its fourth-quarter revenue forecast by $10 million, to $1.27 billion.

That hardly seems like grounds for worry, but eBay investors wanted more -- specifically, higher profit targets for the crucial holiday quarter and beyond. eBay says it expects to earn 21 cents a share in the fourth quarter, a penny short of analysts' estimates, thanks to dilution from the just-closed, $2.6 billion-plus purchase of Internet communications upstart Skype Technologies. As a result, eBay's stock fell up to 7% in after-hours trading, following a pre-report 4% uptick that lifted shares to $42.01.

Mild as eBay's disappointment was, it could throw a shadow over what had been shaping up as a promising quarter for most e-commerce companies (see BW Online, 10/10/05, "They're Still Shopping"). So could the uncertain economy, higher energy prices, and the effects of Hurricanes Katrina and Rita, which have shaken consumers' confidence. "If consumer spending slows, that's going to affect business across the board," says Scott Devitt, an analyst with Legg Mason Wood Walker.

MANY SUNNY VIEWS. Still, most e-commerce companies continue to be optimistic. More than half the 119 online retailers surveyed recently by trade group Shop.org and E.W. Scripps' (SSP) Shopzilla comparison-shopping service expect sales growth of between 20% and 99%. Some 19% of them expect holiday sales to double or more.

Overall, U.S. e-commerce sales will rise about 23%, to $85.2 billion, according to a recently raised forecast from Citigroup Research -- a forecast generally shared by analysts. Says Merrill Lynch analyst Justin Post: "We're looking forward to a good holiday quarter for e-commerce."

So does eBay itself, in fact. In an interview with BusinessWeek Online, Chief Financial Officer Rajiv Dutta noted that eBay outperformed its own third-quarter forecasts handily, even though the summer is usually the company's slowest quarter and the purchase of Skype shaved a penny off earnings (see BW, 9/26/05, "Skype: How a Startup Harnessed the Hoopla").

FURTHER CLUES. "We've been very bullish on our view for the holiday season," Dutta says. The reason: "eBay has millions and millions of entrepreneurs who are incredibly adaptive. They react far more swiftly than any centrally controlled company," adjusting product offerings and pricing to match market demand.

The big question for e-commerce companies, as investor reaction to eBay's report indicates, is how much of the expected sales increases will fall to the bottom line. Like their earthbound counterparts, online retailers may be forced to discount to get customers clicking. Moreover, higher gas prices could shave profits by making shipping more expensive, even as many retailers offer free shipping on some orders.

All that uncertainty will keep eyes glued to upcoming e-commerce earnings reports -- and, more important, on the outlooks for the fourth quarter and beyond. Investors will look for clues in Google's (GOOG) report on Oct. 19, which may reveal ad-spending trends by online merchants. And they'll get a more direct view from Amazon.com's (AMZN) earnings on Oct. 25 and Overstock.com's (OSTK) on Oct. 28, as well as a stream of reports in coming weeks from smaller fry such as Blue Nile (NILE).

AFTER-HOURS HOTHEADS? Despite investors' disappointment, eBay's third-quarter results point to a continued turnaround that began earlier this year. In particular, eBay saw growth accelerate in its two core markets, the U.S. and Germany, after a slow patch that began last year. U.S. marketplace revenues rose 29% from a year ago, and international revenues jumped 43%. eBay's PayPal online-payment unit also saw strong revenue growth of 44%, reaching $247 million.

eBay credited the continued strong growth to a raft of actions earlier this year: improved search technology on eBay's site, more targeted marketing online on sites such as Google, more guarantees of reimbursement on transactions gone bad, and a new push for outside merchants to use PayPal (see BW Online, 9/27/05, "eBay Debuts Member Services and Reviews"). "The strategies we put in place at the beginning of the year paid off handsomely," eBay CEO Margaret Whitman said in a conference call with analysts.

Some analysts believe after-hours traders overreacted. "It certainly seems like business is O.K.," says Derek Brown, an analyst with Pacific Growth Equities, who has one of the few sell ratings on eBay because of what he views as a high valuation at $57 billion. "The business is certainly more solid than it looked last year at this time."

FUELING E-COMMERCE. That bodes well for other big e-commerce companies, such as Amazon. Some observers think high gas prices actually could spur shoppers to click instead of drive, potentially offsetting the slowing economy. The online jewelry store Ice.com, for instance, is offering free shipping on all orders, as well as free returns, in a bid to lure new online shoppers. "It's really going to attract the fence-sitters," says CEO Shmuel Gniwisch.

Others think high gas prices aren't the only reason strapped consumers will tend to shop more online. For one thing, it's much easier to comparison-shop and find bargains online rather than trolling around malls. "The economy issues and energy issues are actually a boon to e-commerce," contends Rob Solomon, vice-president of Yahoo!'s (YHOO) shopping group. Or at least a boon to some kinds of e-commerce: On Yahoo's shopping site, two of the most popular searches currently are "wood stove" and "pellet stove."

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