eBay Bears on parade - a review of analyst comments on eBay's Q2 results.

Rough day for eBay

As predicted after we heard about eBay's slowing of GMV growth, Wall St. has decided that eBay's turn around isn't going fast enough.  The stock is down 13-15% today trading towards $24, a level that the stock has flirted with, but hasn't trade around since 2003.

The primary area of concern is GMV growth. Ex-FX, GMV grew at 4% y/y - Both US and Intl were 4% which represents a material deceleration from Q1.  Ignoring all the positives of the Q, this one datapoint has sent the eBay bears on parade in a major way.

Some Bulls turn into Bears
A number of analystscame out today lowering their ratings and/or price targers:

• Goldman Sachs (James Mitchell)- For the first time in 10yrs that I've followed eBay, GS downgraded eBay from 'Attractive' to 'Neutral'.  James sums up the action: "The lesson from 2Q2008 GMV is eBay’s business is too large and complex to rapidly reinvigorate, especially in a challenging macro climate, causing consumers to trade down."  Goldman calcs a $30 value for eBay.
• Merrill Lynch (Justin Post) - Down to Neutral.  Justin was looking for more acceleration and it didn't pan out.  He also sees a $30 value.
• TWP (Christa Quarles) - Christa has an interesting view.  She says: "Essentially eBay has a “demo problem” in the type of buyer it attracts and shedding the “flea market” image is going to take more time than we originally anticipated."

Existing Bears get Grizzly

The market is focused on GS/ML/TWP changing their ratings off of 'buy', but one group that's always interesting to check in with is the existing bears.  In fact, you could argue that these guys got the call right and if their clients listened, avoided today's bloodbath in the stock. 

• Deutsche Bank (Jeetil Patel) - Jeetil has had a sell on eBay for as long as I can remember and has cited traffic trends, GMV growth, marketing costs and active user deterioration as reasons that the eBay model is broken.  Jeetil also closely follows Amazon's 3P business and reports that eBay's pain is Amazon's gain.  If ecommerce is growing at 15-20% and eBay's growing at 4%, where is that 11-16% going - Amazon? In today's note, JP re-iterates his sell and notes: "We think eBay faces structural issues that may lead to significant operating margin contraction, if the company needs to spend in ads/demand growth, lower seller fees and re-invest in R&D (interface). Note the strategy of increasing sellers fees and couponing has not improved underlying metrics, while recent initiatives may not be enough to carry the business in '08."  Jeetil put a $22 value on the stock - which is a street low.

• Cantor Fitzgerald (Derek Brown) - Derek has had a sell on eBay since initating coverage and re-itereated today, but at a $24 target.  His comments were interesting as they specifically highlight the possibility of increased competition (amazon paypal competitor): "In our view, key operating metrics continue to reveal that the company's core franchise is losing mindshare and marketshare at a rapid pace and that a much-hyped turnaround in it is still very much a work-in-progress. Moreover, we continue to believe that uncertainty and competition may increase for the company in 2H:08, with the prospect of further transitions in its business model, as well as the possibility of a PayPal-esque product introduction from Amazon.com."

Last of the Bulls have interesting take on the Q
An interesting group are those analysts that used yesterday's news to actually get MORE bullish in the face of all the negative sentiment. Long time readers will know that I'm a Scott Devitt fan and here he is with Shawn Milne (the e is silent) swimming upstream:

• Stifel Nicholas (Scott Devitt) - In a sea of bad news, SD found a surprising amount of items to be positive+excited about:
  • SD anchors his view on GMV growth.  In his view GMV growth ex-motors (key differentiator from others) was up 11-12% y/y.
  • Active users (ex-china) grew 6%
  • Marketing services revenue was up 38% and is now 11% of revs.
  • Paypal revenue accelerated (33%) due to off-eBay growth (57%)
  • Believes 80% probability that changes are working.
  • Scott concludes by putting a $33 bogie on the stock (which is $10 up from where we are right now).
• OPCO (Shawn Milne) - Shawn bravely has a $35 target on eBay (i'm guessing he must be street high?)  His arguments:
  • Similar to Devitt, he believes if you peel the onion on GMV growth, it actually increased in 3 largest markets.
  • Loves Paypal
  • Believes guidance is way-conservative and easily beatable
  • Loves valuation here

Analysts that are on the fence

Last, but not least there are many analysts that didn't take any action based on Q2, but had some interesting points that warrant highlighting:

• Citigroup (Mark Mahaney) - M+M (as I call him, not to be confused with Eminem) has a hold on eBay and kept it, but the language in his note was best described as 'grumpy'.  First, Mark referred to eBay's auction business as the 'Anchor around eBay's Growth'.  M+M views the GMV growth as very negative, but the overall results as a beat.  Thus he reiterates the hold, but says they are incrementally more negative.
• BofA (Brian Pitz) - Brian has a buy on the stock and lists out the Q results, many positive, many negative and essentially ends up with a wait and see.  Brian's price target is $38 (ok he must be street high - I'd be shocked if he doesn't bring this down with the stock around $24)
• Cowen (Jim Friedland) - Jim stays neutral and is really concerned with competitors: Amazon and GPS.
• UBS (Ben Schacter) - Very concerned over GMV Growth.  Kept neutral, reduced PT to $30
• Morgan Stanley (Mary Meeker) - Kept 'overview-v', put a $35 target on it.
• JP Morgan (Imran Kahn) - Imran keeps his overweight on eBay.  He views the marketplace biz results as mixed and PayPal/Skype as positive.  He's particularly positive on margins.
• Susquehanna (Marianne Wolk) - Marianne keeps her 'Positive' rating on the stock and is surprised that the results actually weren't worse: "Given the weak economy (which is driving demand for lower priced merchandise), eBay’s discounting and couponing and the shift to classifieds in the vehicle sector, it’s a wonder the business held up as well as it did."  She has a 'sum of the parts' analysis that suggests a $37/share value for the eBay portfolio. She suggests Skype is worth $2.6b which I'm not sure I buy. 

Conclusion
With the exception of Devitt and Milne, overwhelmingly the analysts are concerned about the GMV growth rates for the marketplace business.  That datapoint completely wipes out all of the other positives from the quarter. 

Seeking Alpha Disclosure: Long google and eBay (post coming on this shortly)

Comments

[Gracie Berkshire]

Re: eBay--Deutsche Bank (Jeetil Patel) "...active user deterioration as reasons that the eBay model is broken..."
Yes, it truly all does come down to this--active user deterioration!
The shat-on sellers ARE the buyers on eBay; it's a reciprocal, cyclical marketplace. An ecosystem that is being micromanaged to the point of suffocation by FeeBay Suits/Staff that don't know the first thing about the nuances of selling on their own site.

I believe it is ABSOLUTELY OLD SCHOOL to simply know who your target market is; YOU BETTER BE EMBRACING AND CATERING TO YOUR SUB-RADAR/ALTERNATIVE AUDIENCE.

How can eBay be looking right past their sellers in an effort to attract new buyers? THEY ARE ONE IN THE SAME!

Jeetil Patel in three succinct words --'active user deterioration' definitively has singled out the straw that broke the camel's back.

[Abbi Vakil]

I have no idea what Christa Quarles is smoking. She says: "Essentially eBay has a “demo problem” in the type of buyer it attracts and shedding the “flea market” image is going to take more time than we originally anticipated." A lot of people, eBay management included, are trying too hard to overcome this demo problem when there's nothing wrong with the demo. If every car company tried to compete upmarket with Mercedes, there'd be a huge opportunity for a low cost car manufacturer and that is the problem w/ eBay- they are not being true to their DNA. Instead of worrying about what they are not, they need to embrace what they are, do it better than anyone else (which I think they do) and be happy. Not everybody is going to buy/ sell on eBay so they should stop trying to be all things to all people and instead figure out ways to profit from what they do best- which is create marketplaces for the exchange of goods and services (IMO, services is 1 area where they could be doing a lot more). This is probably the same problem facing Yahoo- trying to something they are not.

[Anon]

eBay stock price was at $22.99 in early August 2006 actually...