Interesting article on eBay from Barrons this weekend:
interactive.wsj.com
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Auction Growth Slows at eBay; Can Earnings
Growth Be Far Behind?
By Mark Veverka
Is the explosive growth in online auctions at eBay going, going, gone?
Theoretically, there is no limit to the number of packs of Pokemon cards that
can be listed on eBay. The inherent beauty of running an online auction is that
your capacity is as large as your computer infrastructure.
However, there may be a natural law of 'Net hawkers, if you will, that limits
how much stuff people are willing to put up for sale on auction sites. And if
so, that might cause some concern for eBay shareholders.
Until now, it has seldom ceased to amaze that the trend in eBay's auction
listings has been nearly an unbroken line skyward. However, since
mid-February, the number of domestic listings has settled in to a range of
4.2-4.4 million, according to a diligent Web watcher who has charted this
phenomenon since December 1998. Given that eBay just launched service in
Canada and has a high-profile joint venture in Japan with NEC, we stress that
these figures exclude international listings.
To be sure, there was a spike upward in September, triggered by a "free
listing day." Conversely, there was a dip in the trend line in December, owing
to a seasonal downturn. In fact, the recovery of eBay's listings after the
holiday slippage was rather impressive; the trend line regained its course.
Until February, that is. Then the growth in auction listings began to stall. With
the exception of the first week of April, when an uptick occurred, eBay's
listings have been basically flat.
What does all this mumbo-jumbo suggest? Certainly, competitors like Yahoo!
and Amazon.com may be taking share from eBay with their rival auctions. But
it may also be that there's a limit to how big eBay's core domestic auction site
can grow. And this could be problematic for this 'Net darling, a rare e-bird
that has been profitable since the day it went public.
Sell-side analysts on the Street use
the auction listing data as a way to
calculate future revenues and profits.
While eBay earns a nominal fee
(typically, 25 cents to $1) for each
item put up for auction, it makes a
bigger take on the back end by
earning percentage-based
commissions on completed
transactions (as much as 5% of the
sale price).
Merrill Lynch Internet analyst Henry Blodget predicts that eBay's earnings will
soar 236% by the end of this year, to 33 cents a share. (He was unavailable
at press time to comment on the slowdown in auction growth.) At Thursday's
close of $138 13/16, that would place Blodget's forward-looking P/E
estimate at a pricey 420 times 2000 earnings for the year.
Investors may be willing to pony up for that kind of multiple for a
hyper-growth e-commerce stock. Indeed, eBay's 41 million total auctions in
the fourth quarter represented growth of some 200% over the year-earlier
level. But such growth is obviously unsustainable. In just three years, it would
mean that eBay would be running 367 million auctions -- more than one for
every man, woman and child in the U.S.
Of course, fans are optimistic that the company will continue to find new ways
to expand its "platform" into other areas beyond the core U.S. auction site,
such as localized auctions, overseas expansion and business-to-business
exchanges. All of which eBay is doing. (Isn't it funny how all of the consumer
Websites these days are jumping on the B2B bandwagon?)
What's more, there is a point at which eBay would be less concerned about
the number of listings as long as the average transaction price were swelling.
For example, the company hopes that cars will be a popular item on localized
auctions, with listings going for a flat $50 a pop.
But skeptics contend that buyers and sellers might be compelled to complete
auto transactions off the site, which would ace eBay out of the
more-important backend commissions.
One partial explanation for the worrisome trend in the growth of listings is that
software developers are pressing for a major crackdown on auction sites for
selling bogus software. Last week, the Software & Information Industry
Association released a study contending that 91% of the software peddled
over online auction sites, including eBay, Yahoo, Amazon and Excite, is
counterfeit.
"Pirates and auction sites are making ill-gotten gains at the cost of copyright
holders and the buyers," who may not know that they are buying knock-off
software, states Peter Beruk, an SIIA officer.
EBay spokesman Kevin Pursglove
maintains that any losses in software
listings have been offset by growth in
other categories. More important, he
says, is that eBay isn't too concerned
with the current trend in auction listings.
"Listings are an interesting thing to look
at, but sellers are more interested in
selling their merchandise," Pursglove
states.
Which is why, he argues, eBay's gross
merchandise sales are a more important measure of the company's health.
GMS tallies the total value of all the stuff sold over the site during a given
period. The GMS for the fourth quarter of 1999 rose 25% from the third
quarter to about $900 million, Pursglove noted. "It's a more accurate
reflection of the company's economic activity," he says.
That may be true, but it is possible that GMS growth might eventually suffer if
eBay's listings growth continues to slow.
Perhaps we should have seen the Nasdaq selloff coming. Sure, we've
observed plenty of ominous signs over the past few years, only to see the
indexes plow through one would-be market top after another.
Well, here's a red flag we should pay attention to. As you may have heard,
Northern California's real-estate values are so hyper-inflationary they would
make even Donald Trump blush.
San Francisco managed to insulate itself from the kind of severe realty
recession that hurt its neighbors to the sunny south in the early 1990s, largely
because of anti-development political forces, a scarcity of land and the fact
that it's confined by water and mountains. That said, there were still a lot of
half-empty Class B and C office buildings in the financial district as recently as
two years ago.
Not anymore. It seems San Francisco is running out of light industrial space
south of Market Street to incubate the dot.com masses. Thus, the Palm Pilot
brigade is forgoing the soft-loft for the retro office tower.
That development, of course, is good news for real-estate. But lately,
landlords have been getting a tad greedy. Acquaintances of ours in dot.com
circles tell us that many landlords are demanding pre-IPO equity from their
tenants as part of their rental agreements. But that isn't the frightening part. It
turns out that the landlords are selecting their tenants based on the qualtity of
buzz generated by their Internet business models.
Specifically, we hear that one Internet startup focused on yesterday's segment
dujour -- business-to-consumer -- offered to pay 5% more per square foot,
in cash, than the next bidder. But the landlord spurned their cash-heavy offer
for that of a tenant dangling private stock options of a more coveted B2B
Internet model.
Landords are turning down cash rent for options in B2B companies even as
Safeguard Scientific, the father of the Internet incubator, has turned its back
on the group. If this isn't a sign of a market past its prime, what is? |
