From American Technology Research analyst Mark Mahaney's note to clients:
EBAY: Bottom? Maybe. Buy Now? No.
EBAY reported a Modest Beat & (Very Debatable) In-Line quarter -- $1,032MM revenue was $1MM above the Street and $0.20 EPS came in $0.01 above (adjusting for the changed tax rate and other items). New revenue guidance comes in just a shade below the Street, and new EPS guidance now matches consensus, but a lowered tax rate assumption creates most of the upwards EPS guidance revision.
For the second quarter in a row, fundamentals clearly deteriorated -- organic revenue growth deceleration from 39% to 33% and 230 bps Y/Y margin contraction.
We have at times been Big Bulls on EBAY, and with the 43% YTD correction, we're sorely tempted to call the bottom right here. But we're not tempted to recommend that investors Buy here at this time. Yes, we're Bulls on e-commerce, eBay's business model, its management team, and its long-term growth outlook. But what's the incremental Bull case? U.S. transactions revenue ONLY decelerated to 19%?!!? That's NOT enough. We 're focused on deteriorating overall fundamentals, the outlook for continued Y/Y margin contraction and revenue deceleration, a valuation multiple that is in-line with YHOO and GOOG (each of whom have more attractive fundamental trends), and the continued existence of Red Flags: 1) Sales & Marketing still growing faster than revenue -- 41% versus 36%; 2) China GMV grew only 11% Q/Q in March; 2) and guidance was squishy.
We are raising estimates -- 2005 EPS from $0.77 to $0.81 -- but that's due to the $0.01 March quarter upside and the lowered tax rate. Our operating income estimates remain essentially unchanged. And we're lowering our Target from $50 to $43 on lower target multiples -- 33X our 2006 FCF of $1.30, 25X our 2006 EBITDA of $1.61, and 40X our 2006 EPS of $1.06.