Wall Street Divided Over eBay's Q4 results

In the last week as the dust has settled on Q4, an interesting divide has started to become apparent amongst the Wall St. analysts that follow eBay. I spent some time this weekend reading most of the preview reports and it seems the main area where the firms differ in their viewpoint is not on the listing counts which they all admit were not as robust as they hoped (anywhere from 5-15% below expectations), but in the revenue generated from those listings.

The mid-point of eBay's transaction revenue guidance is $1.052b and this is the part Wall St. is watching very closely. Of course the performance of PayPal and Skype will play a factor, but all eyes are on the core business and it's corresponding revenue.

This is oddly similar to the 2004 Q4 season when signs of eBay's slowing first came to light when Q4 results failed to delight and the company's stock was hit very hard and hasn't really recovered since. Given the significance of that historical data point, I thought it would be useful to readers to dig into this because as a seller, you have "hitched your wagon" to the eBay star, so understanding how the financial world looks at the company can be important.

The Bulls would argue that while the listings were a little light, due to improved conversions and ASPs, eBay's revenue/listing will be significantly higher thus making up for any gap from listing revenues and potentially generating net positive results ahead of expectations.

Bears don't see it that way. they argue that in order to cover the listings miss, eBay needs to have increased revenue/listing 5-10%. Revenue per listing has been trending down since Q104 so this seems unlikely.

In the Bull camp, you have a sampling:

• Justin Post (Merrill) - BUY - listings good, $20-30m upside
• Bob Peck (Bear Stearns) - Outperform - $33 price target - Listings at 646m met target.
• Imran Kahn (JP Morgan) - overweight - Listings targets were met.

In the Bear camp, you have:

• Jeetil Patel (DB) - HOLD - $29 target - 640m listings in Q4, represents 10% y/y core growth. GMV growth at 14% y/y for the Q is below the 18% they wanted to see. The UK has slowed and DE is not growing at all.
• Safa Rashtchy (Piper Jaffray) - Under perform - $25 target. Listings 10% below expectations, 07/08 too aggressive, need to come down. Q4 revenue miss of $33-53m possible.

I have to admit to being somewhere in the middle. Amongst eBay's largest sellers, this was a great holiday season. We definitely saw a stronger y/y listing increase than the aggregate numbers are showing and that was due to definitely increased conversions during Q4. On ASPS, we saw an increase there, but it's due to the mix of goods sold not due to consumers willing to pay more. This is an important distinction. It's assumed when someone says that ASPs on eBay are up, that sellers+Wall St. frequently view this as an indication that buyers are willing to may for goods. That's not the case and as long as I've been following eBay, prices have been on the decline for like goods year over year. So when ASPs are going up, what we see happening is a mix shift of goods. For example, if you have 50% of GMV from the video game ($20 ASP) and 50% GMV from the golf category ($120 ASP), and that switches to 25%/75%, the ASP will move up significantly. This mix change happens within the total ebay world at a Macro level and even at a micro-level (the individual seller level). We frequently see sellers abandon lower price items because the amount of work and small margins on a < $20 item are no longer worth the hassle on eBay. Thus those sellers tend to only put on eBay items over $20. This moves the ASP up, but it's not necessarily a positive for eBay because the selection of the good < $20 items has been degraded.

In any case, I think eBay still has a tough road ahead. In 07 it will become apparent that eBay Express isn't solving any problems, Skype is not going to be generating high-margin dollars any day soon, Europe is slowing and Asia is pretty much done. eBay has two places to turn for growth: core US/Europe and acquisitions. I don't think the markets would look favorably on another big acquisition (e.g. facebook for $Xb), so that leaves really one option. A healthy eBay core is good for the entire market so I'm actually viewing that eBay is being somewhat forced to address core's issues as a long-term positive. The biggest risks are:

a. Is it fixable?
b. Can it be fixed quickly
c. Will eBay make the hard decisions that it takes to fix core?

We'll know the answer to the Q4 question on Jan 24th when eBay reports.

What do you think eBay Strategies' readers - will eBay come out of Q4 with a 20-50m beat on revenue or 20-50m miss? Are the core issues fixable and will eBay do what it takes to make the changes? This is your time to make your 2007 predictions.

Note: Due to the high rate of comment spam, I had to turn on comment approval, it may take 24-48hrs for your comment to appear now, but I will get to it and only filter out irrelevant spam.

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