eBay Earnings Preview: Analyst Downgrade Overshadows Future (EBAY)

October 15, 2008 by Douglas A. McIntyre

Ebay_logoeBay (NASDAQ: EBAY) is set to release earnings after the close today.  It is still hard getting used to this without Meg Whitman conducting the conference call, but that is just the way of change.  Keep in mind that eBay just gave a shareholder event presentation last week and due to the slide in the stock they updated guidance. 

It said it would post revenues in the low-end of the range at $2.115 to$2.120 billion, but noted that both GAAP and non-GAAP EPS would exceedthe high end of the range.   The actual expectations from First Callare $0.41 EPS on $2.13 billion for this last quarter report today.Estimates ahead are $0.47 EPS and $2.43 billion in revenues for Q4,which generates $1.73 EPS and $8.94 billion in revenues for all of2008.  In case eBay is willing to go out on a limb for 2009, thoseestimates are $1.89 EPS and $9.96 billion in revenues.

Also keep in mind that an analyst downgrade from Merrill Lynch may havechanged these consensus numbers, or it at least put on a "negative ordownside bias" to the numbers.  Whatever would have been acceptable forguidance yesterday now has to be lower today. 

As far as other analysts, the estimates for Q3 have remained the same,but there was roughly a 6% reduction to Q4 estimates over just the lastmonth and 2009 estimates have come down in teh same time.  It seemsthat now there are just going to have to be some very low bars set atthe online auction giant.  But we would like to point out one keyissue: IF eBay meets 2008 and 2009 earnings, then it trades withforward P/E multiples of 9.1-times for 2008 and 8.35-times for 2009.

Internet pioneer Marc Andreessen just recently joined its board.  Italso just purchased "Bill Me Later" in an effort to accompany itsPayPal and similar transaction systems.  eBay called the total presentvalue approximately $1 billion with growth at about 36%.

eBay has a lot of room to improve and it needs to stand by cases ofobvious fraud better.  I recently had a case where I purchased an itemfor more than $400.00 from an auctioneer who committed blatant fraud byjust never sending the item.  eBay’s PayPal unit only guarantees$200.00, which left me on the hook for more than 50% of the purchase.I have since curbed my use of eBay to almost nothing, with this beingprobably 85% of the reason.

eBay is also going to have more and more suits filed over counterfeitgoods such as purses, brand jewelry, and more.  It has won most of itscases, but this is just going to be a real cost of it doing business byfacilitating the sale of these items whether they are real,second-hand, or fake.  In most cases they will win.  After all, a fleemarket owner cannot ultimately be held responsible for whether or notone of the booth renters is selling hot merchandise.  But theallegations can always come down to the prudent man rule or the actualefforts taken to preserve a legal marketplace.

But there is a key area which has been a problem and one that offers a significant opportunity down the road.  As far as the analyst community is concerned, Skype is an area which eBay has not properly been able to monetize.  If Skype can become a "net positive" to the analysts that cover eBay, then its $20 billion market cap might see some improvement.

Merrill Lynch’s downgrade may have actually been a downgrade at thebottom based upon the data ahead and on the recent performance.  Youcould almost argue that eBay’s earnings might be irrelevant now as aresult of today’s more than 10% drop to under $16.00.  eBay’s 52-weektrading range is $15.00 to $20.68.  Its current share price takes thecompany back to levels not seen since 2002.

Jon C. Ogg
October 15, 2008

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