eBay: A Review of Analyst Comments on Q2 Results

Rough day for eBay

As predicted after we heard about eBay's (EBAY) slowing of GMV growth, Wall St. has decided that eBay's turn around isn't going fast enough.  The stock is down 13-15% today trading towards $24, a level that the stock has flirted with, but hasn't trade around since 2003.

The primary area of concern is GMV growth. Ex-FX, GMV grew at 4% y/y - Both US and Intl were 4% which represents a material deceleration from Q1.  Ignoring all the positives of the Q, this one datapoint has sent the eBay bears on parade in a major way.

Some Bulls turn into Bears

A number of analysts came out Thursday lowering their ratings and/or price targers:

• Goldman Sachs (James Mitchell)- For the first time in 10yrs that I've followed eBay, GS downgraded eBay from 'Attractive' to 'Neutral'.  James sums up the action: "The lesson from 2Q2008 GMV is eBay’s business is too large and complex to rapidly reinvigorate, especially in a challenging macro climate, causing consumers to trade down."  Goldman calcs a $30 value for eBay.
• Merrill Lynch (Justin Post) - Down to Neutral.  Justin was looking for more acceleration and it didn't pan out.  He also sees a $30 value.
• TWP (Christa Quarles) - Christa has an interesting view.  She says: "Essentially eBay has a “demo problem” in the type of buyer it attracts and shedding the “flea market” image is going to take more time than we originally anticipated."

Existing Bears get Grizzly

The market is focused on GS/ML/TWP changing their ratings off of 'buy', but one group that's always interesting to check in with is the existing bears.  In fact, you could argue that these guys got the call right and if their clients listened, avoided Thursday's bloodbath in the stock. 

• Deutsche Bank (Jeetil Patel) - Jeetil has had a sell on eBay for as long as I can remember and has cited traffic trends, GMV growth, marketing costs and active user deterioration as reasons that the eBay model is broken.  Jeetil also closely follows Amazon's 3P business and reports that eBay's pain is Amazon's gain.  If ecommerce is growing at 15-20% and eBay's growing at 4%, where is that 11-16% going - Amazon? In today's note, JP re-iterates his sell and notes: "We think eBay faces structural issues that may lead to significant operating margin contraction, if the company needs to spend in ads/demand growth, lower seller fees and re-invest in R&D (interface). Note the strategy of increasing sellers fees and couponing has not improved underlying metrics, while recent initiatives may not be enough to carry the business in '08."  Jeetil put a $22 value on the stock - which is a street low.
• Cantor Fitzgerald (Derek Brown) - Derek has had a sell on eBay since initating coverage and re-itereated Thursday, but at a $24 target.  His comments were interesting as they specifically highlight the possibility of increased competition (Amazon paypal competitor): "In our view, key operating metrics continue to reveal that the company's core franchise is losing mindshare and marketshare at a rapid pace and that a much-hyped turnaround in it is still very much a work-in-progress. Moreover, we continue to believe that uncertainty and competition may increase for the company in 2H:08, with the prospect of further transitions in its business model, as well as the possibility of a PayPal-esque product introduction from Amazon.com."

Last of the Bulls have interesting take on the Q

An interesting group are those analysts that used Thursday's news to actually get MORE bullish in the face of all the negative sentiment. Long time readers will know that I'm a Scott Devitt fan and here he is with Shawn Milne (the e is silent) swimming upstream:

• Stifel Nicholas (Scott Devitt) - In a sea of bad news, SD found a surprising amount of items to be positive+excited about:
  • SD anchors his view on GMV growth.  In his view GMV growth ex-motors (key differentiator from others) was up 11-12% y/y.
  • Active users (ex-china) grew 6%
  • Marketing services revenue was up 38% and is now 11% of revs.
  • Paypal revenue accelerated (33%) due to off-eBay growth (57%)
  • Believes 80% probability that changes are working.
  • Scott concludes by putting a $33 bogie on the stock (which is $10 up from where we are right now).
• OPCO (Shawn Milne) - Shawn bravely has a $35 target on eBay (i'm guessing he must be street high?)  His arguments:
  • Similar to Devitt, he believes if you peel the onion on GMV growth, it actually increased in 3 largest markets.
  • Loves Paypal
  • Believes guidance is way-conservative and easily beatable
  • Loves valuation here

Analysts that are on the fence

Last, but not least there are many analysts that didn't take any action based on Q2, but had some interesting points that warrant highlighting:

• Citigroup (Mark Mahaney) - M+M (as I call him, not to be confused with Eminem) has a hold on eBay and kept it, but the language in his note was best described as 'grumpy'.  First, Mark referred to eBay's auction business as the 'Anchor around eBay's Growth'.  M+M views the GMV growth as very negative, but the overall results as a beat.  Thus he reiterates the hold, but says they are incrementally more negative.
• BofA (Brian Pitz) - Brian has a buy on the stock and lists out the Q results, many positive, many negative and essentially ends up with a wait and see.  Brian's price target is $38 (ok he must be street high - I'd be shocked if he doesn't bring this down with the stock around $24)
• Cowen (Jim Friedland) - Jim stays neutral and is really concerned with competitors: Amazon and GPS.
• UBS (Ben Schacter) - Very concerned over GMV Growth.  Kept neutral, reduced PT to $30
• Morgan Stanley (Mary Meeker) - Kept 'overview-v', put a $35 target on it.
• JP Morgan (Imran Kahn) - Imran keeps his overweight on eBay.  He views the marketplace biz results as mixed and PayPal/Skype as positive.  He's particularly positive on margins.
• Susquehanna (Marianne Wolk) - Marianne keeps her 'Positive' rating on the stock and is surprised that the results actually weren't worse: "Given the weak economy (which is driving demand for lower priced merchandise), eBay’s discounting and couponing and the shift to classifieds in the vehicle sector, it’s a wonder the business held up as well as it did."  She has a 'sum of the parts' analysis that suggests a $37/share value for the eBay portfolio. She suggests Skype is worth $2.6b which I'm not sure I buy. 

Conclusion

With the exception of Devitt and Milne, overwhelmingly the analysts are concerned about the GMV growth rates for the marketplace business.  That datapoint completely wipes out all of the other positives from the quarter. 

Disclosure: Author is long eBay.

Comments

[Tippie]

I'm hoping that the few analysts who predicted eBay value at $38.00 are correct. eBay should now start to pay a dividend to speed up things, as well as buy back more of their stock!
Hopefully we will see $38.00 by 2010.

[leapingcat]

Perhaps analysts should be suggesting that Ebay should still be pushing its fleamarket type operation with high sell-through rates and higher fees to sellers, rather than trying to attract the type of seller with low sell-through rates and heavily discounted fees. With a recession likely on both sides of the pond, that could prove to be a good growth strategy and a boost to Paypal. Then even $38.00 might be a possibility.

[o.c.d.collectibles]

It's probably a downgrade..I would have to agree that it will be going down lower in price, my
observation based on the loss of traction in the financial report of
Q2 attributing the 3 point downgrade to the "economy" and the "power
seller discounts", "buyer coupons", and what they refer to as "among
other things" as their list of reasons for why the Marketplaces sector
is flailing. Three investment gurus agreed. What puzzled me was why
they did not seem to know much about the customer base that generates
the income for ebay, the auction sellers, not the bidders/buyers.

In their attempts to re-engineer the site, they have long planned out
(at LEAST 2 years) a complete makeover of the entire site making it
pleasing to the eye, and fun to watch with all the flashing
advertisements! Just think of all the affiliate links they can
generate attention to and drive more hits to their site to search for
the best of the best...

The trouble is, the NEW search has to first be tried out on their
members, randomly, because they want to perform the BETA testing
without paying test subjects before unleashing their gift on the
general public.The search functions have not yet been completed nor do
they work effectively for potential buyers and well stocked sellers
who have most of their lives invested in this business.

Add to that, the most indispensable program interface used for the
last few years, called "MY EBAY" has now morphed into a cartoon-like
caricature of something that looks like it came out of a Jetson's
comic book page.This program interface attempts to integrate the buyer
and seller preferences, but actually compromises the seller's ability
to list, monitor, communicate with buyers, and complete their
financial transactions correctly.This has been a huge surprise to the
sellers of successfully marketed items, who now have to look at empty
sales records and no bids or visits to their auction items.

Credit should be given to the data collectors, since, with their
limited amount of time they have left to address the technological and
logistical problems, they at least attempt to "listen"
nonjudgementally to the cries of despair from the already-stressed-out
auction listers.They cannot, however, do anything more than to report
the difficulties and mistakes of the programming to the development
engineers who have so faithfully carried out the wishes of the CEO's
and Board of Directors, without mentioning a word to the ones who they
collect fees for selling, the sellers.

At this very time, moving to the end of July, there are ebay sellers
and buyers from other countries who have been led into the maze of the
new BETA BEST MATCH search, as if it were a preparation for marketing
meat to the general public, without describing this as it seems...

Many ebay members (5%) have been enlisted by the company to be
unsuspectingly forced into a condition that they refer to as "not
being able to opt out" of the given programming, which, has been
stated, is not yet complete for release! Some of these sellers and
prolific buyers have halted their activities due to the system not
responding to the requested needs for change, in order for them to
complete business transactions.

Obviously, how can the value of the Marketplaces go up higher if
there are sellers who cannot operate the interface of the actual site
itself? How?? and when???The interfaces are getting progressively
more complicated and technologically challenged with each passing day.
With no preparation for this testing, these sellers could have
accelerated their listings before hand, OR they could have volunteered
to test the new versions when they had the opportunity to do so
without being scrambled by a poor program's lack of intuitiveness.Now
they are just angered by the lack of respect they have been paid by
this kind of "last minute surprise" treatment and the inability to use
the older reliable version of the programming to earn their
livelihood.

The buyers are experiencing just as much frustration at the inability
to be able to follow the items they want and can find, IF they can
find them, and that is a BIG if. The only items easily found are those
propagated by the marketing companies who are selling their business
sales programs on the site as a way to save the seller's
business.These sellers have been sitting quietly in wait of a bid,
most of which, their items are scrolled past if the potential customer
wants to even bother turning multitudes of pages, since these items
all look the same with very high fixed prices and free shipping
offers.

Was this the original ebay that made the company the success that it
became? Is it a place to work for the "stay at home mom" or retired
veterans,or the teachers and nurses who need to supplement their
marginal incomes to feed their families?Is it a place where new
businesses can thrive without having to outsource to other countries?

Are the forum boards on the ebay site ONLY populated by flea market
sellers who mail out smoke filled packages to unsuspecting 30
somethings, then complain that they cannot get their ratings high
enough to show up in the searches? Is this the picture that had been
portrayed by the leaders of the industry as the source of their ills?

I think maybe the stockholders and investment gurus should take a
closer look at the over 2500 posts to any one subject, so that they
can judge for themselves, instead of listening to the propaganda by
some,and not being able to analyze the problems independently, without
bias because they didn't do enough homework. The sellers who used to bring in high end merchandise, such as antiques and collectibles, are moving to multiple sites now, some are offering these sellers a better deal on "rental space". Take a look at the numbers in iOffer and Etsy, where the vintage market is starting to really take off!

That's about it. Until we all meet again...at another flea market!