posted on January 19, 2005 05:57:56 AM new
eBay Puts Loyalty to the Test
By Kevin Kelleher
TheStreet.com Senior Writer
1/19/2005 7:13 AM EST
Get ready for a bit of drama during eBay's earnings report Wednesday. After the market closes, the online retail giant is slated to report earnings that, according to a consensus from analysts polled by Thomson Financial, will see net profit rise 42%, to 34 cents a share in the fourth quarter.
eBay, which delivered results ahead of estimates for seven of the last eight quarters, is likely to beat the number again. But while anyone long the stock will be jumping up and down in glee, there will be a loud chorus of outrage among a group of people important to eBay's sustained growth: its customers.
eBay, after all, would be announcing record profits less than a week after it substantially raised fees for selling goods on its Web site. The fee hikes range from a 60% jump in the subscription rate for sellers who run eBay stores (from $9.95 to $15.95 a month) to a doubling of the cost of listing items for 10 days (to 40 cents an item from 20 cents).
Why is the company doing this? Simple, because it can. Its customers are paying for eBay's uncanny ability to draw in loyal buyers - a feat that business-to-consumer companies have struggled with but one that's absolutely crucial in providing a community for a consumer-to-consumer site. eBay isn't just selling a platform for online auctions, it's selling access to a liquid marketplace that it created. Sellers may grow blue-faced in their verbal protests, but there's one reason why they'll think hard about staying with eBay -the buyers aren't leaving.
Analysts note that previous fee changes didn't dent eBay's growth. Steve Weinstein, an analyst at Pacific Crest Securities, estimated that the higher fees will bring in $48 million in additional revenue this year, or 1.5% of its estimated 2004 revenue. But more telling, he says, is how eBay is trying to drive higher volume. "eBay generally implements fee changes to drive selling behavior that leads to better overall velocity of trade," Weinstein wrote in a recent research note. Last year, eBay lowered fees on its stores to draw customers in. Now eBay seems to be cashing in on those new accounts.
Hardest hit by the new fees are the 143,000 U.S. independent stores that operate on eBay's site. More than 17,000 people have signed an online petition -- a sample rant: "This could be the final straw, eBay!"
But it does raise the valid question of how much customers will take. And it opens the door to a potential vulnerability down the road. Amazon or Yahoo! have yet to make serious inroads into eBay's auction empire, but they may get a shot if high fees drive more merchandise their way. If the sellers who decide to stick with eBay simply pass on the extra fees in their minimum bids, the buyers may look elsewhere for cheaper offers.
Many sellers have vowed to move their goods over to Overstock.com, which expanded into online auctions last September with subscription fees 30% below eBay's (they are now 60% lower). And some are making good on the threat. Since eBay announced its higher fees on Jan. 13, the number of items available for sale on Overstock.com has risen by 50%.
"It literally started to grow the moment eBay announced its new fees," says Overstock spokesman Scott Blevins. Overstock's stock has risen 13% in the two days since eBay made its changes.
For investors, eBay's report could fill in the blanks on why it's making this move now. If eBay is simply capitalizing on rising demand and loyalty among its customers, or if it's building up leverage to make bold new moves in the future, so much the better. But if there is the whiff of desperation about it - that is, if eBay is doing it because it has to, not because it wants to - then investors may not respond so well.
If past is prologue, however, eBay is leveraging for growth. In recent months, the company has bought apartment listing site Rent.com, a clear signal that eBay was searching for new potential growth areas in the consumer-to-consumer market. It also purchased a stake in classifieds listing site craigslist and acquired Dutch classifieds site Marktplaats.nl. And just last week, it acquired assets of Kurant, a maker of software that adds an e-commerce capability to existing Web sites.
eBay's acquisitions suggest it may be buying small, but it's thinking big about new opportunities. Christopher Casey, a portfolio manager with Boston Private Bank, which is long eBay, says he'll be looking for clarity in eBay's acquisition strategy in the Wednesday call. "They have been buying [a] lot of small businesses," says Casey. "That's been one of their big growth drivers and uses of cash."
Customer drama aside, it's clear eBay had a phenomenal year. The company took what many believed was a small Internet niche and turned it into a way of life. The eBay bug turns out to transcend cultures - people get hooked wherever they live. Merrill Lynch expects eBay's U.S. revenue to rise 28% in the fourth quarter to $387 million. Pretty good in itself, but it looks sluggish compared with the 67% surge in international revenue. At that rate, the international side of the business will eclipse the domestic side early this year.
The question doesn't seem to be whether to invest in eBay, but when. At its Tuesday close of $106.37, eBay was trading at 86 times estimated 2004 earnings and 66 times its estimated 2005 earnings. Those ratios may give some investors acrophobia. Yet given eBay's sterling record of finding hidden and rich mines from which to extract new growth, other investors are having as hard a time saying goodbye to eBay as its customers are.
posted on January 19, 2005 09:07:23 AM new
Yes, very interesting. There's always danger in monopolies, and Ebay seems like a monopoly to me.
___________________________________
Is it true that the only difference between a yard sale and a trash pickup is how close to the road the stuff is placed?
posted on January 19, 2005 09:38:29 AM new
They dominate the market, but are nowhere near monopoly status. The article even notes the growth of competition, so they are not the only viable player.
This is the real key point of the article: "eBay's uncanny ability to draw in loyal buyers" - I may check out the other sites, but certainly don't follow them (as a buyer) the way I do eBay, and certainly, eBay is the first stop for online shopping.
posted on January 19, 2005 01:52:13 PM new
Two other articles from CBSmarketwatch. I don't know how to make these links live, but these are Bambi Francisco "Net Sense" columns:
posted on January 19, 2005 03:36:10 PM new
Ebay announced their results, and they fell short of analyst's forecasts, which caused Ebay's stock to plunge 10% this afternoon, from $103.05 to $93.09. After the bell, they fell another 3% to $89.70. Looks like the Ebay sellers as well as the stockholders got screwed this time around. I can't help but think a FLD on the 26th would have injected enough fees for "extras" plus FVF's for 1, 3, and 5 day auctions to have avoided this.
A $75.00 solid state device will always blow first to protect a 25 cent fuse ~ Murphy's Law
posted on January 19, 2005 04:52:32 PM new
Sparkz - eBay said they thought that earnings would be 32 cents per share. Market Analists decided that they were underestimating and set their estimate at 34 cents. Actual number was 33 cents. In other words, they surpassed their own expectations and saw a 44% increase in profits over the proevious year and you think they should have given away listings, the vast majority of which would not have counted in fourth quarter earnings anyway since only 1 and 3 day listings would have ended before the 31st?
The ACTUAL earnings were higher than market estimates.
BTW - They also announced an upcoming stock split.
~~~ • ~~~ • ~~~ • ~~~ • ~~~
If it's really "common" sense, why do so few people actually have it?
[ edited by fenix03 on Jan 19, 2005 05:05 PM ]
posted on January 19, 2005 05:07:26 PM new
Fenix...You are absolutely correct. You can get a hundred different opinions, including yours and mine, on what happene today depending on which analyst you listen to. Here's one view :
SAN JOSE, Calif. (Jan. 19) - Strong sales of electronics and automobiles caused eBay Inc.'s fourth-quarter profit to surge 44 percent, but Wall Street harshly punished the online auction giant Wednesday after it failed to meet analysts' expectations by a penny per share.
The prospect of lackluster growth in mature markets, particularly the United States and Germany, and sinking stock prices for several high-profile e-commerce companies, sent eBay shares tumbling. In after-hours trading, eBay lost roughly $7.8 billion in market capitalization.
EBay shares plunged 11.7 percent, or $12.04, in after-hours trading after falling $3.32, or 3.1 percent, to $103.05 Wednesday on the Nasdaq Stock Market. The results were released after the markets closed.
A $75.00 solid state device will always blow first to protect a 25 cent fuse ~ Murphy's Law
posted on January 19, 2005 05:40:29 PM new
>> In after-hours trading, eBay lost roughly $7.8 billion in market capitalization. <<
That is more than their next years earnings projections of 4 Billion! I wonder if Meg will be smart enough to figure out that one before she sinks the ship??
Me thinks Ebay will be suffering from foot-in-mouth soon and will have to withdraw the knife they have stuck in their U.S. sellers back.
In a well timed market, announcement of a stock split should have driven the shares upwards reguardless of estimated earnings. I think the stock holders are a little miffed that Ebay would finance it's China market growth by pissing off the very sellers (U.S.)that made their company viable to begin with.
posted on January 19, 2005 05:45:03 PM new
Sparkz - I think these analysts do way too many drugs. The company earning MORE than they expected in actual dollars representing a 44% growth and the stock drops because of the "prospect of lackluster growth" which seems to have no basis in trends and "sinking stock prices for several high-profile e-commerce companies" whose prices probably dropped for equally illogical reasons or whose former customers are the ones responsible for the 44% profit increase.
~~~ • ~~~ • ~~~ • ~~~ • ~~~
If it's really "common" sense, why do so few people actually have it?
posted on January 19, 2005 06:31:52 PM new
You got that right. One analyst even blamed the fact that Ebay's growth was inflated due to the weak dollar and was unsustainable. He went further to suggest that Ebay was possibly going to be in trouble down the road because of their heavy investment in China, which he feels won't be a decent market for online auctions for several more years. I wonder how many of these people have ever actually bought or sold anything on Ebay, other than ouija boards?
A $75.00 solid state device will always blow first to protect a 25 cent fuse ~ Murphy's Law
posted on January 19, 2005 08:27:57 PM new
The UK site is the most profitable of the International sites and that site operates on GBPs which in the past two weeks have returned to almost the same rate they were ate this time last year. Even if the dollar does strengthen (which there are no indicators of happening anytime soon) all the European sites have to do is implement minor fee increases since most charges, at current rates, sit in the middle of where the US fees are now and where they will be after the increase.
As for China... no one can figure out China right now and I doubt anyone really ever will be able to with a true sense of certainty but the fact of the matter is that internally there is one hell of a potential customer base. To be quite honest though, if I were at ebay right now I would be looking for a way to bring Chinese manufacturers/distributors together with US buyers in a wholesale format. Get manufacturers on board listing managable lots with the promise of helping them develop new client bases and allow mom and pop businesses to be able to go straight to the source.
But that's just me
~~~ • ~~~ • ~~~ • ~~~ • ~~~
If it's really "common" sense, why do so few people actually have it?
