20/7/2008 - Kicking the Ebay Bug.

More Jeers Than Cheers for eBay

The good news is that eBay (Nasdaq: EBAY) is growing. The bad news is that it's not growing as quickly as it used to.

The company behind PayPal, Skype, and the namesake online marketplace posted respectable second-quarter results given the iffy economy. Revenue inched 20% higher, to $2.2 billion, from last year. Adjusted earnings rose 25% on a per-share basis, to $0.43 a share. Wall Street was looking for a tweaked non-GAAP profit of just $0.41 a share on a more modest 20% top-line uptick.

Hooray for eBay?

Well, not so fast. Dig into the numbers, particularly the company's flagship marketplace business, and things aren't exactly peachy keen.

Three jeers for eBay
Let's go over a few cheerleading points, if only to unearth the fact that the pom-poms may be a little lighter than you think.

1. Earnings per share are growing faster than revenue, so net margins are improving!
Not so fast, bucko. The key part of that 25% bottom-line growth gauge is that we're talking about "per-share" performance. The company bought back 19 million shares during the quarter and more than that over the past year. That's great for shareholders, but actual non-GAAP net income aped the 20% growth in revenue.

2. Evil defecting power sellers claim that eBay is dying, but it's actually still growing!
Yes, but it's all relative. Growth is decelerating through all of eBay, especially in its bread-and-butter marketplace business. That segment grew by just 13% during the year, and that's padded by the rising popularity of Kijiji and StubHub. Actual GMV (gross merchandise value) sold through eBay's websites during the quarter rose by just 8%, and that figure becomes just a 4% advance if you adjust for foreign currency translations. Listings are up, perhaps peppered by the company's deal with Buy.com to populate the site with retail content, but conversion rates and average selling prices are down.  

3. That's all right. That's OK. We don't need the namesake website anyway!
PayPal is a star. Revenue climbed 33% to $602 million on a 35% spurt in payment volume. Most of the growth is naturally coming from outside of the decelerating realm of eBay.com transactions. It's a testament to PayPal's ability to grow its merchant platform even when bumping up against Google's (Nasdaq: GOOG) Checkout.

Skype is growing even faster, with its revenue shooting 51% higher, but Skype still commands a mere 6% slice of the revenue mix pie here. Despite eBay's efforts to diversify, the marketplace slice of the revenue mix has only shrunk, from 66% of total revenue to 57% over the past two years. 

Smells like lean spirit
eBay.com's second quarter proved to be a clash of contrasts. The economic stimulus checks that began going out in May probably spurred activity on the site, but it didn't help the company's eBay Motors division, where year-over-year growth was flat. Sure, that's a lot better than the sorry state over at General Motors (NYSE: GM) on the new-car side, but what happened to e-commerce outpacing retail growth? Used-car specialists America's Car-Mart (Nasdaq: CRMT) and CarMax (NYSE: KMX) posted year-over-year revenue growth of 29% and 3%, respectively last month.  

Then we have eBay's guidance. The company's new outlook calls for adjusted earnings of $1.72 to $1.77 a share this year, on $8.8 billion to $9.05 billion in revenue. It is slightly higher than its outlook from three months ago, but the ratcheting consists exclusively of the better-than-expected second-quarter results. The company is leaving its second-half outlook unchanged.

Normally that wouldn't bother me. eBay is a renowned sandbagger. It lays out conservative guidance, only to crush those targets. I'm not so sure that eBay has the agility to keep that up, though. The deceleration -- at all three of the company's flagship verbs -- is sobering. Wasn't eBay supposed to be a recession-resilient company that attracts thrifty deal-seekers in tight times? 

It all starts with eBay.com itself, where the headcount of 84.5 million active users is a mere 1% improvement over the roll call a year ago. eBay may claim that active users would have risen by 6% if you back out the company's retreats in China and Taiwan, but that's not a ringing endorsement. If you want some skin in the overseas auction action, hop on the faster horses provided by South Korea's Gmarket(Nasdaq: GMKT), China's Taobao, and Latin America's MercadoLibre (Nasdaq: MELI). 

Until eBay's growth begins to accelerate, it's only natural to expect its earnings multiple to continue to contract. A couple of years ago, buying eBay with a P/E ratio in the high teens would have seemed impossible. These days, it's not only possible but well-earned.

Like the items being swapped on eBay.com itself, folks aren't getting bargains just because the average selling prices are lower. There is more to that story. There is more to that hollow cheerleading. It's halftime at eBay, and the locker room isn't exactly buzzing heading into the second half.