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EBay shares decline on forecast, revenue worry

EBay Inc shares fell 12 percent, the biggest decline since April, after the largest Internet auctioneer didn't raise earnings forecasts as much as analysts expected and got a higher portion of sales from advertising revenue.

The shares dropped US$7.11 to US$51.95. They had risen 79 percent this year.

EBay on Friday brought fourth-quarter profit and sales forecasts in line with analysts' estimates. Some analysts expected the company to boost them higher. EBay, which collects fees as the operator of an online marketplace, got 13 percent of its revenue from ads in the third quarter, up from 8 percent in the first.

Analysts consider ad sales a less stable source of revenue.

"EBay is `priced to perfection,' so any taking away of upside is judged very harshly by the market," said Dave Hutchison, an analyst at Insight Capital Research, which owned 1.3 million of the company's shares at the end of June.

Analysts said EBay had a more cautious tone than expected on its Thursday conference call, during which the company discussed a 24 percent increase in third-quarter net income to US$18.8 million, or US$0.07 a share.

Management's discussion of the lingering effects of the Sept. 11 terrorist attacks on business may cause investors to sell shares, the analysts said.

EBay increased its forecast for fourth-quarter profit excluding certain costs by US$0.02, to US$0.12 a share, and said revenue would be US$200 million to US$210 million.

The profit estimate was in line with the 12-cent average estimate of analysts polled by Thomson Financial/First Call.

Analysts already had projected revenue of US$208.13 million.

"That's the thing that is dragging the stock down here," said Deutsche Banc. Alex. Brown analyst Jeetil Patel, who rates EBay a "buy" and doesn't own any shares. He said it was prudent for EBay to be conservative given the current economic and political environment.

The amount of advertising revenue San Jose, California-based EBay had in the third quarter was a concern to Lehman Brothers analyst Holly Becker. Some Internet companies have been criticized for being too reliant on advertising in an era of declining online ad spending.

"We view this [advertising revenue] as an unsustainable, non- core revenue source,'' she wrote in a report. Becker this week won the top spot in Institutional Investor magazine's ranking of analysts following Web commerce.

Analysts said it appeared that revenue from EBay's US auctions grew more slowly on a sequential basis. US Bancorp Piper Jaffray's Safa Rashtchy lowered his rating to "neutral" from "buy."

He said US auction revenue grew by 2 percent between the second and third quarter, compared with 8 percent between the first and second quarters.

"EBay was always considered to be recession-resistant and a company that would do well in good and bad times," said Rashtchy, who doesn't own the stock.

He said investors are concerned because the economy did affect the results.

Insight Capital's Hutchison said that EBay's price decline was ``overdone'' and that the company's business remains sound.

The third-quarter slowdown in US auction-business growth was primarily caused by the terrorist attacks and by EBay's decision to devote part of its site to "Auction for America," a charitable program to raise US$100 million for attack victims through the sale of items, he said.

"They still beat [third-quarter] earnings per-share estimates; they still beat revenue," Hutchison said.

"I don't see real evidence that the economic slowdown is affecting them as much."
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