eBay Earnings Eve Examinations – Part II – A tale of a Bull and a Bear

January 22, 2008

Marketplaces ChannelAdvisor By ChannelAdvisor

Bull_bearNote this is a multi-part topic so please be sure to read part I here before jumping into this part II.

At this point in the series, you maybe asking yourself: “Self, why am I continuing to read this stuff about Wall St. Analysts, bulls/bears, etc.  I’m an eBay seller and this has nothing to do with my business.”  Ah that’s where you’d be wrong.  As an eBay seller you have essentially chosen to partner with eBay and  put your boat right on the eBay tide.  If our Bull, Heath Terry is right, that tide is going to be rising.  The stock is at $27 and he has a target of $46.  That implies some good days ahead.  Conversely Jeetil has a $24 on the stock that’s already taken a serious beating.  That portends some tough and tougher times ahead of us all that may require some belt-tightening, diversification and definitely some business ‘headwinds’.

Of course only time will tell if our Bull or Bear are right, but there are important insights to be gained by understanding each of there positions.  Let’s start with the glass half full and see what Heath has to say.

Heath Terry, Credit Suisse, eBay Bull, Outperform, $46

  • Believes Q4 will be stronger than expected
    • Research shows conversion rates up, listings beat estimates and ASPs up – together this will be strong plus
    • Believes they will come in above $1.4b revenue in marketplaces and this will be ++
  • Concerned about Skype
    • eBay’s messaging that it’s over monetized may mean it needs investment (less monetization I guess?)
  • Weak dollar will help eBay (Q4)
  • Key focus is 2008
    • Believes eBay will be optimistic on many segments
    • Expect some margin contraction (lower margins)
    • Thinks that growth in non-GMV businesses (paypal/skype/shopping/ads) will offset the core investment
  • Bottom line
    • Market is overly negative on eBay now
    • Compelling valuation, share-buyback and movement on solving marketplace problems make this an overweight/$46 bogey.

So to boil that down from an eBay seller standpoint, one concern here would be the potential increase in ad revenue (translation – more banners on ebay.com?), but we all love the increased conversions and ASPs.

Jeetil Patel, Deutsche Bank, eBay Bear, Sell, $24

In his latest report (came out today and was largely ignored in the ‘Meg is retiring’ noise), Jeetil did a very interesting analysis.  He looked at what happened to eBay in Korea.  The reason being is in Korea, eBay was getting eaten alive by Gmarket who has a 0% listing fee, FVF only model.  eBay was forced to counter that competitive threat by moving to a similar model in their Korean marketplace (and do some better merchandising, etc.).  The Korean eBay fee change somewhat stemmed the tide of GMV to GMarket. Jeetil’s thesis/observation is that this is a story that is starting to sound vaguely familiar and a deeper analysis might give some insights into how the eBay/Amazon battle could play out here in the USA.

With that background info, here are Jeetil’s major points:

  • Korean Analysis
    • In 2006 eBay had to go to no listing fee, all FVF
    • KR margins dropped from 25-31% (04/05) to 3% today (ouch!)
    • KR revenue growth went from 40% in 05 to 7% in 07
    • eBay KR illustrates the problems the US will face with a change in the fee structure
  • 08 outlook
    • Watch for change in fee structure, to keep current fee/margin structure, eBay will have to charge 18-19% in FVF without listing fees, this is obviously higher than Amazon’s 15%
    • eBay needs to spend big $$ on advertising to acquire customers
    • Heard rumors of a hiring freeze in Q4, thinks RIF could be on way to manage margins
    • In the US, eBay faces a tougher competitor than Gmarket in Amazon
  • Bottom line:
    • Core business is losing share
      • Pageviews down 20% y/y
      • Core listings down 5-15% y/y
    • eBay will have to spend on marketing+R+D and change fees
    • If KR situation plays out, margins will be under significant pressure
    • Margins could go from 30-40% range today to 10-20% range

From an eBay seller’s standpoint, I’m not sure we care about eBay’s margin, but the prediction of a really high FVF is something to definitely keep an eye out for.  I was always assuming it would be 0%/8%, but I see Jeetil’s point that in the media categories where conversions are really low it would have to be higher to be margin/revenue neutral.  The traffic trend isn’t new (Brad Stone NYT covered in-depth), but that was uniques, pageviews seem to be really declining (you could argue this may show finding is improving?)

There you have it – Bull vs. Bear, who do you think has the future of eBay nailed?  At Catalyst this year we could just throw these guys into a big pile of Jello and let them fight it out….

P.S. Jeetil’s report had an interesting chart of eBay’s pageview trends I thought you may find interesting so included it here at the end as bonus for those of you patient (crazy?) enough to read this far 😉