eBay shares yesterday fell 20% following an analyst’s downgrade.
Following yesterday’s downgrade of the stock by Lehman Brothers from buy to neutral, online auctioneer eBay’s shares fell by 20% to their lowest level since January 1999. The securities firm is worried that eBay it is not growing as fast as it was. Growth in total auctions listed, users, and gross merchandise sales are all slowing.
This is certainly true. However, it may not justify the change in rating, or the fall in share price. The market opportunity for the eBay business is still evident: the company predicts that by 2005 the global market for online auction services could reach the $2 trillion mark, up from its current value of $1.6 trillion.
eBay also generates high gross margins from its auctions, with a target of mid-80%, and also charges a fee to all sellers using the site. In order to meet its own challenging growth targets (50% year on year growth), eBay is committed to a global expansion program. It plans to establish a presence in 10 international markets by the end of 2001 and to have extended that coverage to include 25 markets by 2005. And whilst growth may have slowed, the company’s revenues are still growing at 10% per quarter, or 46% per year.
The company’s growth is still admirable, and it is one of the few Internet-only brands to have already reached profitability. The slowed growth in number of auctions and merchandise sales is to be expected of any auction company that reaches maturity. Once the site has attracted a critical mass, the growth levels will naturally be lower than initial years of operation – the same with any old economy business.
As eBay comes closer to being measurable on price/earnings metrics (like a traditional firm), the market valuation will change. In the meantime, the fall in share price makes the stock look undervalued. eBay’s growth may have slowed from previous years’ dizzy heights, but this certainly doesn’t mean the company is in trouble.
