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EBay profits not enough for investors

No matter how much Collins & Co's Bruce Raabe likes what Margaret Whitman has done as chief executive of EBay Inc, he doesn't plan to buy shares of the biggest Internet auction company.

"Our problem has always been the valuation," said Raabe, who manages US$500 million in assets as chief investment officer of Collins, based in Larkspur, California. "As great as the company is, we just can't even justify 50-times earnings."

EBay shares trade at almost double that multiple, with a price-to-earnings ratio of 92 times that of last year's earnings. By that measure, it's the 11th-most-expensive stock on the S&P's 500 Index, where the average P/E ratio is 30.

This year, Whitman won over investors and cemented EBay's standing as one of the few dot-com survivors by getting rid of unprofitable divisions and buying its biggest rival in electronic payment processing. EBay shares have declined only 13 percent compared with a 23 percent drop in the S&P 500.

Now Whitman, who has increased sales eightfold since joining EBay in 1998, is under pressure to deliver on the expectations for earnings growth implicit in a valuation that high.

"If they missed a quarter or the growth rate slowed down, there would be a lot of people leaving the stock," said Dave Hutchison, an analyst at Insight Capital Management, which manages US$1.1 billion in assets and owns 557,000 EBay shares.

After three of its past four earnings reports, EBay shares fell because the company gave revenue projections that were lower than analysts' or didn't raise its profit estimates, disappointing investors.

San Jose, California-based EBay said net income more than tripled to US$61 million, or 21 cents a share. Profit excluding some expenses, such as costs for stock-based compensation, rose to 22 cents from 12 cents a year ago. Revenue climbed 49 percent to US$288.8 million.

Some investors, such as Hutchi-son, say concerns over EBay's valuation obscure the job Whitman, 46, has done.

Under the former Hasbro Inc general manager, the company has reported net income in every quarter since its 1998 initial public offering. Amazon.com Inc, the largest Internet retailer, has been profitable once since its May 1997 IPO.

EBay outlasted Amazon and Yahoo! Inc's efforts to expand into online auctions and now figures it will handle most of the US$13 billion in such transactions that market researcher Forrester Research Inc predicts will take place on the Internet in the US this year.

"They're smart enough to know when they've made mistakes and to correct it quickly," said Scot Wingo, president and chief executive officer of closely held ChannelAdvisor Corp, which helps large corporations sell on the Internet.
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