eBay Should Withhold Guidance As Core Business Continues to Struggle

eBay is scheduled to report 4Q08 earnings on Wednesday Jan. 21 and the Street is projecting revenues of $2.120bn and Adjusted EPS of $0.40. My work suggests that those numbers are achievable but 2009 Street estimates of $8.7bn and adjusted EPS of $1.65 could be a challenge to meet. As such, I believe that eBay should withhold providing guidance for 1Q09 and for full year 2009. Doing so should help stabilize the share price and reduce volatility in the near-term.

It goes without saying that eBay's core business remains challenging, while results from the payments, classifieds, and advertising businesses are strong. However, in order for the shares to recover, the core business will have to start performing. My estimates are calling for a dramatic 12% FX-neutral decline in 4Q GMV and an 8% decline for full year 2009, as slow auto sales weigh-in more negatively. Ex-autos, I expect a GMV growth rate of -6%. Unless the GMV growth rate stabilizes the shares are likely to languish for some time.

Listings trends have been strong and conversions on the auction business is stable per the data that I have analyzed. However, the BIN conversions are off sharply and ASP numbers are declining rapidly. In addition, it appears that listings quality has been declining. Further, per the comScore data, traffic to the site continues to decline as eBay's demand problem worsens. On the sell side, sellers are still departing the site in significant numbers to other channels such as Amazon (buyers are going to Amazon as well). Clearly the business remains challenged.

What is eBay's Management to do?

1. For starters, forget about issuing guidance and blame it on macro conditions that make it difficult to predict anything with surety. No one can argue with that.

2. There are clearly certain categories such as collectibles and autos that are perfectly suited to auctions while others are not. Adjust the model to reflect that reality. Contrary to some, I do not believe that eBay's entire auction business is structurally challenged.

3. Pull back on the share buybacks and allocate more capital to technology investments. Search on the site is lethargic. Management should either invest heavily in that area or outsource that function to one of the search providers like Google.

4. Sell Skype. It is not additive to the core business model. It is a telecommunications company and investors wishing diversification can do so on their own.

5. I would keep the payments business within the portfolio because selling it would put the current synergies at risk. However, if pressures mount, then a spin-off of the payments business, where eBay is the majority shareholder, would make sense.

6. Eliminate your high priced consultants and listen to your "sellers". They are the best source of input and their advice is free. Maybe create a high level management position like a seller czar, so to speak, whose sole function is to work with the sellers.

7. Develop a more effective marketing strategy to get buyers back on the site.

8. If all else fails, consider a merger with another one of the Internet leaders such as Google, Yahoo!, or Microsoft.

Meanwhile I will remain on the sidelines but will continue to monitor the business for any critical turning points. The shares are trading at extremely cheap multiples for an Internet stock at 4x '09 EBITDA and 8.0x Adj. '09 EPS. But shares are cheap for a reason and for eBay it's the struggling core business.