Wednesday, January 27, 1999
DJIA 9282.62 -41.96 (-0.45%) S&P 500 1250.40 -1.91 (-0.15%) Nasdaq 2431.49 -1.92 (-0.08%) Russell 2000 423.38 -1.95 (-0.46%) 30-Year Bond 101 21/32 -5/32 5.14 Yield

An Investment Opinion
by Warren Gump

eBay Soars on Earnings, Split

Internet auction phenomenon eBay (Nasdaq: EBAY) was bid up $74 1/8, or 34%, to $295 after announcing earnings for the holiday quarter and a 3-for-1 stock split (effective March 1). Fourth quarter earnings per share of $0.07 (excluding charges for acquisitions and amortization of stock compensation) was $0.03 above the First Call consensus estimate of $0.04. Beyond the 642% quarterly increase in revenue and 600% increase in earnings per share, the stock was buoyed by comments from Donaldson, Lufkin & Jenrette analyst Jamie Kiggen, who raised his price target to $360 from $100.

Enthusiasm for Internet stocks makes it hard to project what will happen to the stock over the near term. One of the reasons that eBay has proven so popular with investors is that it developed a business model that is already profitable, whereas so many other companies are suffering massive losses as they "build their brands." In addition, the Internet auction market is scalable, meaning that it doesn't cost much more to add significant numbers of customers. Additional revenue from these users drops almost entirely to the bottom line.

Certainly, competition can't be ignored in this market. Yahoo! (Nasdaq: YHOO), Excite (Nasdaq: XCIT), uBid (Nasdaq: UBID), Sotheby's (NYSE: BID), and Greg Manning Auctions (Nasdaq: GMAI), among others, have entered the fray. Because of its leadership in the auction market, however, eBay has a definite lead. During the quarter, eBay increased the number of registered users by almost 76% to over 2.1 million. Such a lead is imperative because the most active communities will offer the most effective and efficient auctions. More buyers attract more sellers, which in turn brings in more buyers and so on. Being the first mover in this market has given eBay a significant competitive advantage.

Long-term investors, however, need to stop and determine whether most of the upside has already been priced into the stock. At its current price, eBay is valued at around $12.7 billion, or 254x 1998 revenue. How large do you think the Internet auction market is going to become? Just looking at the Internet auction market is not sufficient, though.

eBay can use its stock as currency in acquisitions, moving into additional markets. When, what, and where these acquisitions are anybody's guess. Such transactions could doubtlessly add to the intrinsic value of the company, particularly if the acquired company has a new product that needs exposure to a significant community (such as eBay's users). Unfortunately, I don't know of anyway to predict what kind of companies these acquisitions will create. They could, no doubt, help create a major Internet enterprise. One only need to look at the @Home (Nasdaq: ATHM) and Excite combination to see how two Internet companies gain from pooling operations.

Cutting to the thick of it, though, my money is off the table on eBay. From a long-term perspective, I'm not convinced eBay will achieve market-beating returns from its current valuation. Even with the dramatic growth of the Internet auction market and the possibility of wildly successful acquisition possibilities, the stock is too expensive for my investment portfolio. If I'm not highly confident about a company offering a "margin of safety" from a valuation perspective, I don't buy. We'll have to wait a few years to see if such conservatism is profitable.


Online retailing giant Amazon.com (Nasdaq: AMZN) swung up $13 19/32 to $128 11/16 after turning in a Q4 loss of $0.14 per share (before charges), below last year's $0.08 loss but better than the Wall Street estimate of an $0.18 loss. CFO Joy Covey said in a conference call yesterday that the company expects Q1 revenue growth higher than Q4's $253 million despite the holiday boost. The Fool recently interviewed Amazon CEO Jeff Bezos on the radio -- the transcript is reprinted here.

Brewpub chain operator Rock Bottom Restaurants (Nasdaq: BREW) munched on gains of $1 13/16 to $8 5/16 after the company said it has received three separate "indications" of interest in buying the company, including one by a new company formed by Chairman Frank B. Day. Rock Bottom hired Piper Jaffray to advise it and formed a special committee to examine the proposals.

Leading Internet portal company Yahoo! (Nasdaq: YHOO) moved ahead $7 3/4 to $359 following reports that the company launched sites in Singapore, Taiwan, and Hong Kong and is looking for partners to continue growth in Asia. India and China are target audiences, according to a report from Reuters.

Streaming media aggregator Broadcast.com (Nasdaq: BCST), which Lehman Brothers initiated coverage of with a "buy" rating today, advanced $7 1/4 to $146.

Online software delivery technologies company Digital River (Nasdaq: DRIV) flowed ahead $6 to $43 7/16 after announcing a partnership with CompUSA (NYSE: CPU) to provide software downloading from the retailer's online store.

Integrated circuits developer Broadcom Corp. (Nasdaq: BRCM) ran ahead $15 1/2 to $145 after reporting Q4 EPS of $0.26, well ahead of last year's $0.06 result and analysts' $0.18 consensus estimate. The company reported plans for a 2-for-1 stock split effective Feb. 1.

Drug and healthcare products giant Warner-Lambert (NYSE: WLA) popped up $3 1/8 to $72 1/4 after agreeing to acquire Agouron Pharmaceuticals (Nasdaq: AGPH) in an all-stock deal valued at roughly $2.1 billion. Agouron stepped up $2 1/2 to $59 5/16 on the news this morning; for a closer look, ask the chef for another helping of today's Breakfast With the Fool.

Life sciences company Monsanto Co. (NYSE: MTC) grew $1 7/8 to $46 3/4 as The Wall Street Journal reported that the company's new Celebrex arthritis pain medication is off to a fast sales start, generating more than 9,900 prescriptions in its first week. Warner-Lambert's Lipitor cholesterol drug, with about 4,000 prescriptions in week one back in 1997, was the former #2 among recent drugs, behind Viagra.

Component and supply management software company Aspect Development (Nasdaq: ASDV) advanced $7 1/2 to $311 1/8 after Credit Suisse First Boston upgraded the stock to "strong buy" from a "buy" rating.

Computer chip templates maker DuPont Photomasks (Nasdaq: DPMI) moved up $2 5/8 to $45 5/8 after Morgan Stanley Dean Witter upgraded the stock to "outperform" from "neutral" while NationsBanc Montgomery Securities boosted its rating to "buy" from "hold." The company reported fiscal Q2 EPS of $0.20, a penny ahead of Street estimates, yesterday morning.

E-commerce services provider iMALL (Nasdaq: IMAL) bagged $7/8 to $17 5/8 after it said the company's Korean licensee has expanded its "mall" to include several hundred storefronts. iMALL hopes to continue similar expansion in other Far East markets this year.

Tupperware Corp. (NYSE: TUP) partied its way up $3 1/2 to $18 15/16 as the company said it is targeting a "modest increase" in Q1 net income even if sales are flat or slightly down. The company reported Q4 EPS of $0.64, down from $0.76 last year but a nickel ahead of Street estimates.

Office and adhesive products maker Avery Dennison Corp. (NYSE: AVY) tacked on $3 7/16 to $46 1/2 after Merrill Lynch upgraded the stock's near-term rating to "accumulate" from "neutral." The company reported Q4 EPS of $0.54, in line with market projections, yesterday and said it's undertaking a broad reorganization that will cut 1,500 jobs (about 9% of the total workforce) and reduce Q1 earnings by between $0.40 and $0.42 per share.

ITT Educational Services (NYSE: ESI), which offers technically oriented post-secondary degree programs, moved up $2 5/8 to $36 3/4 after Starwood Hotels & Resorts Worldwide (NYSE: HOT) priced an offering of 7 million shares of ITT Educational stock at $34 per share.

Earnings Movers

AmeriSource Health (NYSE: AAS) up $1/2 to $78 1/8; fiscal Q1 EPS $0.73 vs. $0.60 last year; estimate: $0.72

Aspen Technology (Nasdaq: AZPN) up $3/4 to $15 7/8; fiscal Q2 EPS $0.02 vs. $0.28 last year; estimate: loss of $0.02

Bell Atlantic (NYSE: BEL) up $5/16 to $55 7/8; Q4 EPS $0.69 (before charges) vs. $0.62 last year; estimate: $0.69

Cadence Design Systems (Nasdaq: CDN) up $1/2 to $29 5/8; Q4 EPS $0.36 vs. $0.29 last year; estimate: $0.35

CheckFree Holdings (Nasdaq: CKFR) up $7/8 to $37; fiscal Q2 EPS breakeven (before charges) vs. loss of $0.02 last year; estimate: breakeven

Clarify Inc. (Nasdaq: CLFY) up $1 15/16 to $25 13/16; Q4 EPS $0.15 vs. $0.03 last year; estimate: $0.13

Parexel International (Nasdaq: PRXL) up $3 5/16 to $27 5/8; fiscal Q2 EPS $0.21 vs. $0.08 last year; estimate: $0.22

RealNetworks (Nasdaq: RNWK) up $1 1/4 to $65 1/2; Q4 EPS loss of $0.02 (pro forma) vs. loss of $0.09 last year; estimate: loss of $0.04

Steris Corp. (NYSE: STE) up $11/16 to $29 15/16; fiscal Q3 EPS: $0.33 vs. $0.26 last year; estimate: $0.32

Watkins-Johnson Company (NYSE: WJ) up $2 1/8 to $23 1/4; Q4 EPS $0.25 vs. $0.76 loss last year; estimate: $0.15


Bank holding company First Union Corp. (NYSE: FTU) slid $5 7/8 to $51 3/16 after saying it has stopped using gain on sale accounting for sub-prime home equity securitizations, which will end up reducing fiscal 1999 earnings by $0.08 to $0.12 per share. The First Call mean estimate had called for earnings of $4.29 per share this year. The company is now forecasting operating EPS growth in the "mid to high single digits" in 1999. At least four brokerages downgraded the company today.

Bookseller Borders Group (NYSE: BGP) was burned for a $2 3/4 loss to $17 1/2 after announcing that Q4 sales were $945.5 million while fiscal 1998 sales were $2.595 billion. Lower-than-expected January sales will result in fiscal 1998 EPS between $1.11 and $1.13, including a $0.12 to $0.13 loss from the company's online operations. In fiscal 1999, the online unit is expected to post sales in the neighborhood of $25 million and a loss of $0.21 to $0.24 per share. BT Alex. Brown cut its rating to "buy" from "strong buy."

Internet-related software developer ImaginOn Inc. (Nasdaq: IMON) tumbled $3 1/16 to $8 5/8 after the company denied rumors of a possible deal with America Online (NYSE: AOL), which helped boost the company's shares by 21% yesterday.

Chip performance accelerator technology developer NeoMagic Corp. (Nasdaq: NMGC) fell $2 5/16 to $14 11/16 after Morgan Stanley Dean Witter cut its rating on the stock to "outperform" from "strong buy."

Contact lenses and surgical instruments maker Cooper Cos. (NYSE: COO) slid $3 9/16 to $13 1/4 after warning that production delays at its CooperVision contact lenses unit will result in fiscal Q1 (ending Jan. 31) EPS of $0.27 to $0.30 (excluding charges), which is short of the $0.45 estimate of the sole analyst surveyed by Zacks.

Telecomunicacoes Brasileiras S.A. (NYSE: TBH), which is a tracking stock for the twelve companies resulting from the breakup of Brazilian telephone monopoly Telebras last year, slid $1 15/16 to $61 7/16 after Merrill Lynch lowered its near-term rating on the stock to "accumulate" from "buy."

Disk drive thin-film media maker Komag Inc. (Nasdaq: KMAG) spun $2 1/8 lower to $11 7/8 after reporting a Q4 loss of $0.35 per share, which was below last year's earnings of $0.02 but a bit better than the loss of $0.40 per share forecasted by analysts surveyed by First Call. However, the company said its sales in Q1 will only be "slightly higher" than the $92.7 million posted in Q4.

Telecom billing and customer service software provider Saville Systems (Nasdaq: SAVLY) was dumped for a $3 5/8 loss to $22 1/4 despite reporting Q4 EPS of $0.25, up from $0.20 last year and a penny ahead of the IBES mean estimate. However, ING Baring Furman Selz lowered its rating on the company this morning to "buy" from "strong buy."

Splash Technology Holdings (Nasdaq: SPLH) belly-flopped $1 5/8 to $7 7/8 after saying its Q4 EPS was $0.12, beating the Zacks mean estimate by $0.03. The maker of color printer servers said revenues in the quarter dropped 29% from a year ago to $15.7 million as unit sales growth was offset by a transition to lower product pricing. Those conflicting sales trends are expected to persist in the near-term, according to the firm.

Online software retailer Egghead.com Inc. (Nasdaq: EGGS) was scrambled for a $1 7/8 loss to $18 1/8 after reporting a fiscal Q3 operating loss of $0.36 per share, which was a bit worse than the loss of $0.29 per share posted last year. An increase in the company's aged product inventory reserve and a free shipping promotion for its website hurt gross margins, which fell sequentially to 8% from 10.6%. Looking ahead, Chairman and CEO George Orban said the company faces "many challenges" in the next two quarters.


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