Everything in the rearview mirror looks fine, but the road ahead may be bumpy for eBay (Nasdaq: EBAY). Despite pulling off a quarter that was stellar in just about every way -- from accelerated stateside revenue growth to market-topping profitability -- the company presented an outlook for 2006 that fell short of the market's expectations.
The world's leading online auctioneer is looking for adjusted earnings to clock in between $0.96 and $1.01 per share in 2006 on a revenue range of $5.7 billion to $5.9 billion. Wall Street had been perched at the high end of the top- and bottom-line ranges.
It's easy to see why the market is upset over the company's guidance. On the low end, we'd be talking about earnings growth of a mere 12%. The forecast also implies tighter margins, as revenues are set to inch 25% to 30% higher in 2006.
Then again, we also have a lot of unknown variables that could swing results either way. Those who believe that eBay didn't overpay for Skype -- and I am in that camp -- are likely to wonder whether the company can cash in on the popular Internet-based communications platform sooner rather than later. The synergies are certainly there.
We're also seeing some aggressive moves out of eBay, such as lowering its final transaction fees for smaller auctions while slightly raising its fees on mid-priced sealed deals.
There is also the rollout of eBay Express. With "Buy It Now" auctions now accounting for a third of the completed transactions on the site, eBay Express is a new feature that will allow buyers to load up on fixed-price items and check out in a single transaction. This concept, however, looks better on paper than in functionality. While eBay is trying to emulate leading online retailers such as Amazon.com (Nasdaq: AMZN) and Overstock.com (Nasdaq: OSTK), those merchants typically fulfill an order with items from the same warehouse. In contrast, what's the point in lumping together an Alf alarm clock from Des Moines with a Dukes of Hazzard lunchbox from Phoenix in the same transaction? Didn't eBay buy PayPal to make small, individual transactions feasible and convenient?
Both eBay and Amazon have been solid performers since being recommended to Motley Fool Stock Advisor subscribers a few years ago. It's interesting how each company has increasingly come to mirror the other over the years -- now they both offer auctions and emphasize checkout simplicity. They both serve as a platform for third-party merchants, too. And, on the downside, both companies are coping with slower growth in the year ahead, despite forward earnings multiples in the low $40s.
That outlook, if it holds true, will make 2006 challenging. But that doesn't mean the year will end badly. Both companies have some dynamic online initiatives beyond the bread-and-butter business, and besides, proven, profitable dot-com brands deserve market premiums.
Longtime Fool contributor Rick Munarriz is a satisfied eBay user, with 156 positive feedbacks to show for it. He does not own shares in any of the companies mentioned in this story, and he is a member of the
Rule Breakers
analytical team, seeking out the next great growth stock early in its defiance.
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