eBay Converions And Listings Are Up But Staying On The Sidelines

In a prior write-up on eBay (see eBay's Demand Problem Worsens), I quoted data from Jeffries & Co. analysts Youssef Squali that eBay's global listings were up close to 40% YoY, but that traffic to the site was down 11% YoY, suggesting that the demand problem had not been fixed

However, I have analyzed conversion rate data for the quarter and the data suggests a surprising improvement in auction conversion rates on a sequential basis. On the other hand, the fixed price conversion rates entered a tailspin in early September and never recovered in 4Q. Taken together, the overall company conversion rates remained steady from the third quarter.

Wall Street Analysts have suggested that company wide conversion rates have deteriorated in the quarter, so if my data is correct, then the increased listings with steady conversions would be a positive for eBay and would suggest a possible beat for the quarter.

However, it is too early to call a turnaround in the business because eBay's structural problems persists and the demand problem has not been corrected. Although eBay has been one of my favorite companies to watch over the years I am staying on the sidelines as there are more attractive investments with better upside potential and with lower operational risks.


From A Recent Note By JPMorgan Analyst Imran Khan:
We are maintaining our Neutral rating on eBay. We believe weakness in usage and
conversion, as well as a more competitive broader eCommerce market, present
challenges that will make it difficult for eBay stock to outperform in the coming
months. Our 12-month price target is $17.

• Marketplaces usage metrics point the wrong way. ComScore data indicates
that the number of US users coming to eBay’s sites declined 17% Y/Y in the
three months ended 10/08. We believe the decreased usage and difficulties in
optimizing the search algorithm have resulted in significant weakening of
conversion for eBay listings. These factors are offsetting the gains from
revitalized listings growth on the platform.

• Are online auctions a mature market? Auctions traffic has been anemic, as we
believe a more mature eCommerce market is increasingly driving buyers to
expect a top-flight user experience and an ability to order items, especially new
items, immediately. We think this shift presents a challenge to eBay: auctions are
a near-monopoly for the company, whereas consumers seeking immediate
purchases have a wealth of options, of which eBay is only one.

• PayPal unit remains a prize asset. Payments revenue was up 32% Y/Y through
9M’08, and we are projecting 22% growth in F’09 as the off-eBay side of PayPal
remains a key growth contributor; additionally, we expect a slight benefit as the
impact of the Bill Me Later acquisition is folded in.

• 2009 drivers. In our view, the following factors will drive shares in 2009: (1)
changes in Marketplaces conversion driven by better search, (2) corporate
structure changes such as a sale of Skype, and (3) the impact of any credit market
developments on the receivables book at Bill Me Later.

• Maintaining 4Q’08, F’09 estimates. We are maintaining our 4Q’08 and F’09
revenue, EBITDA and EPS estimates; we are introducing new F’10 estimates; all
these are summarized in the table below: