Did Meg Whitman Hold eBay Back?

This morning's eBay (Nasdaq: EBAY  ) upgrade by Merrill Lynch is a conspiracy-theory magnet. After all, it comes just days after Meg Whitman officially ended her tenure as CEO. That is really the only thing that has changed at eBay between the analyst's neutral rating a week ago and a buy today.

Burned power sellers will say that eBay got too greedy on Whitman's watch, by perpetually raising fees and tweaking terms against a landscape of cheaper alternatives that offered a more seller-friendly approach. That's a fair criticism. But I'll defend Whitman by saying that she did an amazing job, early in her tenure, of transforming a promising collection of hobbyist traders into a revolutionary site that launched cottage industries and verbs.

So, when did eBay jump the shark? Some will argue that it was when it overpaid for Skype in 2005. You could point to 2004, when it purchased a 25% minority stake in Craigslist and gave validity to a rival that it would never be able to swallow whole. Still others might point to several quarters after the Skype purchase, when year-over-year domestic listings growth began to shrink.

Sell it now
The world changed as eBay looked on helplessly. There is little that eBay could have done -- and little that it can do now -- to battle the proliferation of free listing sites and the emergence of search engines such as Google (Nasdaq: GOOG  ) and Yahoo! (Nasdaq: YHOO  ) as cheap lead generators for today's Web-savvy sellers. The competitive landscape has changed, no matter how much fun eBay tries to make its walled community.

At least the company still has PayPal, the undisputed champ in online micropayments. That is one subsidiary that has kept eBay's financials strong, even as the growth has gradually gone dry at its namesake site.

Whitman took eBay as far as it could go. She should be applauded for her efforts. I'm just not all that excited about the company she leaves behind. It's hard to buy into the company's growth prospects, given today's prices.

Yes, that means I disagree with the theory behind Merrill's upgrade. The reasons Merrill cited include the company's cautious outlook (which is more of a red flag to me), the new ideas that will come with new management (an even bigger red flag), and the pipe dream that gross-merchandise value growth will somehow accelerate.

The auction format isn't dead. Growth at jewelry specialist Bidz.com (Nasdaq: BIDZ  ) proves that. Nor is e-commerce dead. Accelerating revenue growth at Amazon.com (Nasdaq: AMZN  ) over the past two years hammers that point home.

The niche isn't the problem. It's eBay that's the problem.

The pitfalls of eBay
I find it hard to buy into the premise that eBay is some slumbering giant that can be awakened with a few small adjustments.

The company seemed to concede that its pricing was out of whack earlier this year. After years of watching revenue outpace the growth of gross-merchandise value on the site, eBay eventually realized that sellers weren't going to put up with the trend of having bigger chunks of their proceeds going to eBay.

So what did the company do? Well, it lowered insertion fees, but it partially offset that move with increases in the fees it collects on successful auctions. In other words, it rewarded frivolous listings while punishing its best converters. You don't want to get a former power seller all worked up by asking for an opinion on eBay's recent feedback policy changes.

What I'm saying is that it may be too late to reinvent eBay. If you don't believe me, perhaps the stock's valuation will give you a jolt.

Yes, eBay is trading for roughly half the all-time peak that it set during the 2004 holidays, but that still doesn't make it cheap. The company's 2008 guidance is sobering. eBay is looking for adjusted earnings growth in the single digits this year. Given its adjusted trailing earnings multiple of 20, the market is loaded with more attractive stocks packing brighter growth prospects at cheaper valuations.

So I can't blame Whitman for leaving. If I were an eBay investor, I would probably be tempted to follow suit, if not for the beauty of a workhorse that PayPal has become. I just don't see the "Buy it now" button begging for this morning's upgrade.

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