Thursday, January 25, 2007

Color on quarter: eBay (NASDAQ:EBAY)

Several firms are commenting on eBay (NASDAQ:EBAY) after the co issued surprisingly strong results and guidance last night:

- Piper Jaffray says that while eBay produced a strong quarter with upside to their estimates, the majority of the upside came from foreign exchange.

Listing growth has slowed considerably (12% y/ y); while monetization improved to $1.75 (ex forex) in Q4 from $1.65 in Q3, it failed to reach firm's target of $1.80. Unclear how much of the monetization improvement was Q4 seasonality.

Revenue per active users improved to $13.05 (ex forex) from $12.01 which is a positive sign and slightly above the bar the firm set in their last note as an indication of a reversal. Investors should continue to watch this to see how much seasonality and one-time high demand products affected this metric in Q4.

Usage growth continues to decelerate as active users increased only 14% y/ y in Q4, down from 17% in Q3, and at 82M was 2M below the 84M necessary to stabilize this metric. GMV growth (ex forex) flattened to 16% y/y growth, and likely benefited from higher ASPs in the quarter.

Despite the stock's strong positive reaction in the after-hours market, they believe eBay failed to produce a quarter that would indicate sustainable acceleration of growth. Firm believes an assumption of a declining growth rate for core is still the more realistic scenario. However, despite deteriorating fundamentals, the company is likely to continue to produce acceptable earnings results, helped by non-core factors, in the near term and as such, the stock is likely near its floor. They are therefore increasing their rating to Market Perform to reflect this reality and increasing price target to $30 from $25. They do believe that the near term cash generation of eBay will eventually catch up with its deteriorating fundamentals and slow down, but until then, investors are likely to give EBAY a more generous multiple.

- Deutsche Bank reiterates HOLD investment rating on shares of eBay despite the solid 4Q results that came in soundly ahead of expectations. While they are encouraged by the solid performance (and modest improvement in the underlying metrics), it remains a little difficult to fully extrapolate exactly where eBay's upside came from, especially with listings/transactions up 10%/11% Y/Y and GMV up 16% (FX adjusted).

Despite the respectable performance in 4Q (that should be well received by investors today), theythink that eBay faces longer term structural challenges in its business (that may be on hold in the near term). Specifically, the company still has to aggressively invest in demand (via marketing) to generate transaction volumes and GMV, a concept that may be fine tuned but difficult to defend against as off-line retailers (i.e. BestBuy, Wal-Mart, Circuit City, etc.) spend online to take advantage of lower-priced online media buys. As a result, seller feedback still remains negative from the notion that sellers are seeking for growth in sales and profits (for which growth
is proving increasingly elusive these days). While the stock will be up on short covering as a result of the 4Q strength, they think investors should wait on the sidelines to see if the 4Q uptick was a seasonal event or a sustainable trend.

Deutsche is raising their 2007 EPS estimate from $1.19 to $1.27, with revs now at $7.201bn from $7.007bn. $100mn in revs came from the StubHub acquisition. Tgt goes to $32 from $29.

- RBC Capital notes listings growth decelerated, but EBAY rebalanced the US marketplace, increased conversions, and stabilized ASPs. PayPal shrugged off the competitive threat from Google Checkout. Currency and acquisitions also added to growth. Finally, eBay will benefit from the repurchase of another $1b of stock, and the authorization of an incremental $2bn over the next 2 years.

Management raised guidance due to StubHub, which accounted for an incremental $105mm-$120mm, carryover of strong trends in 4Q06 accounting for about $60mm, offset by the exit from China of about $10mm-$15mm.

Using full 2008 estimates on EBAY (vs. blended 2007/2008),the firm now arrives at a price target of $38. They believe shares will have some follow through beyond the one-day earnings related move today, giving the company the benefit of the doubt in the near term. RBC is unsure whether this is a situation driven by easy compares and currency upside, or whether to believe the trends will remain strong throughout 2007.

Maintains Sector Perform rating.

Notablecalls: Looks like short covering will be the name of the game today. Yet, decelerating listings and usage growth will continue to weigh on the stock after the shorts are out of the way. The stock traded as high as $34 in after hrs. It may have some more upside in it, but I suspect it won't be more than say half a point.

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