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Filter - Cynthia L. Webb
EBay Wins a Beating


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By Cynthia L. Webb Staff Writer
Thursday, July 22, 2004; 9:34 AM

Online auction company eBay placed the winning bid yesterday for a punch in the nose courtesy of Wall Street, making it the latest company to get slammed for its tepid financial forecast despite solid quarterly profit and revenue.

"The San Jose, Calif., company's share price fell 5.5% to $72.40 in after-hours trading. In 4 p.m. Nasdaq Stock Market trading, before the announcement, the shares had already fallen $3.35, or 4.2%, to $76.60," the Wall Street Journal said in its report of eBay's second-quarter results.

"The reaction underscores the high investor expectations for leading Internet companies such as eBay and Yahoo Inc., both of which are Wall Street favorites that tend to lose favor, albeit temporarily, if the companies don't significantly increase their financial forecasts. Yahoo's shares are off 13% since it disappointed investors earlier this month with results and forecasts that weren't as strong as some had hoped," the Journal reported. The Financial Times picked up on this trend too: "The continuing deflation in the eBay share price -- now off by about 20 per cent from the high touched three weeks ago -- echoes a broader retreat in internet stocks from their recent highs. Yahoo has also fallen more than 20 per cent since the end of June, while is down nearly as much."
The Wall Street Journal: EBay Net Doubles But Stock Slides On Summer Sales (Subscription required)
Financial Times: eBay Shares Retreat After Disappointing Outlook News

Wall Street's reaction to eBay's results further dampened the tech sector's mood. Tech stocks overall have already been taking a beating recently. "Internet stocks had been riding steadily upward for more than a year, buoyed by surprisingly strong profits by companies such as Yahoo. But rising interest rates, continued problems in Iraq, the summer doldrums and slower earnings growth at several bellwether companies have dampened investor enthusiasm and raised fears that a tech recovery may be reaching a plateau," the San Jose Mercury News reported. "The environment in the market is pretty nervous," Steven Colton, portfolio manager for Phoenix-Oakhurst in Scotts Valley, Calif. told the paper.
San Jose Mercury News: EBay Reports Strong Earnings (Registration required)

"Technology stocks are really dragging the overall market down," John Caldwell, chief investment strategist for KeyCorp.'s McDonald Financial Group, told the Associated Press. "But it's not tech alone. ... We're talking about a market that is more difficult to impress and very easily disappointed." USA Today also painted a dreary picture: "July has been an absolutely dreadful month for tech stocks. The Nasdaq composite index, which is dominated by companies that make software, semiconductors and other high-tech gadgets, has lost 8.5% of its value since June 30. The Nasdaq, which tumbled 2.2% Tuesday to 1874, its lowest level of the year, has declined 10 of 14 sessions this month. The dreary performance is reminiscent of the painful three-year period from 2000 through 2002 that wiped out nearly 80% of the Nasdaq's value -- not the 'party like it's 1999' market of 2003, when techs skyrocketed 50%. A growing lack of confidence in tech companies' ability to meet lofty profit projections for the second half of the year is sparking the recent sell-off. While the bulk of companies that have reported second-quarter profits have posted decent numbers, there has been a dearth of positive blowouts. Perhaps more damaging, corporate executives from a variety of tech firms have been reluctant to brag about the profit opportunities ahead. That suggests a robust rebound in business spending might not materialize."
Associated Press via Newsday: Tech Stocks Drag The Market
USA Today: Tech Stocks See 'Summer Swoon'

The Los Angeles Times also weighed in on the downward trend: "After four weeks of mostly edging lower, the market on Wednesday had more of a tone of anxiety to it, some analysts said, with trading volume jumping to its highest level in nearly a month. Selling was heaviest in tech shares and smaller stocks, but even blue chips had their worst day since at least May. The Dow Jones industrials fell 102.94 points, or 1%, to 10,046.13. Losers swamped winners by more than 3 to 1 on the New York Stock Exchange and on Nasdaq. Earnings reports have received much of the blame for the poor start to the second half. On balance, the reports have been beating analysts' expectations. But many big-name companies' forecasts for the year have been less optimistic than what Wall Street had hoped to hear."
Los Angeles Times: Tech Stocks Lead Drop As Investor Angst Rises (Registration required)

And Now... the Numbers

EBay reported second-quarter net income of $190.4 million (28 cents a share) on revenue of $773.4 million. That compared with net income of $91.9 million (14 cents) on revenue of $509 million. Even though the results beat Wall Street's expectations, that's apparently not all it takes these days. The Journal explained why investors soured on eBay's results: "[EBay's] growth has traditionally been so rapid that the company has consistently posted significant sales increases even from the prior quarter. The company has always seen some seasonal slowdown starting in the summer, when many forms of Internet usage decline as students leave school and families take vacation. But the second quarter's sequential growth from the first quarter was the lowest eBay has recorded for any consecutive quarters, and the company predicted third-quarter revenue will remain essentially flat, compared with the second quarter."

"If you're a growth investor, one of the things you want is to not only see year-over-year growth, but quarter-over-quarter growth," Caris & Co. analyst David Garrity told the San Francisco Chronicle. "Down 2 percent is not growth." The Associated Press said the company took a hit because "risks associated with overseas e-commerce -- including uneven seasonal shopping trends and competition from foreign rivals -- shook investors' confidence in eBay, one of the most stable dot-com stocks."

More on how eBay is changing with the seasons, from the Los Angeles Times: "After strong gains during the winter holiday season, EBay executives said they saw a sharper-than-usual slowdown heading into the summer. As the company becomes more mainstream, they said, it's starting to more closely mirror the seasonal dynamics of the offline retail world. They still expect sharp growth near the end of the year, which includes the crucial holiday shopping months. But in the meantime, they predicted, third-quarter revenue will be slightly lower than in the second quarter." And more: "For the full year, EBay boosted its revenue forecast to nearly $3.19 billion and its earnings before certain items to $1.17 a share. But Wall Street had expected sales of $3.21 billion and earnings of $1.19 a share."

EBay chief executive Meg Whitman defended her company during a conference call yesterday: "There is no question that seasonal trends are becoming more pronounced as eBay becomes more mainstream. In light of this ... seasonal shift, our results were strong and consistent with our business."
San Francisco Chronicle: EBay Has Begun Showing Its Age
Associated Press via EBay 2Q Earnings Beat Analysts' Estimates (Registration required)
Los Angeles Times: EBay Says Sales Gains May Slow (Registration required)
Reuters: EBay Profit Up, Shares Fall On Outlook

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