eBay Shares Plunge Ahead of Thursday "Analyst Day"

News that online auctioneer eBay (NASDAQ: EBAY  ) has decided to excise VMware (NYSE: VMW  ) software that runs storage in its servers and replace it with free, open-source OpenStack software sent shares of VMware tumbling almost 5% in Monday trading. But the news isn't doing eBay stock any favors, either.

According to a report published on Business Insider today, eBay and its PayPal subsidiary have begun removing VMware virtualization software from about 10,000 servers -- the first stage in a longer-term effort to switch over to OpenStack on all 80,000 servers running in their data centers.

This is obviously bad news for VMware. The company's about to lose software licensing fees on 10,000 pieces of hardware -- and the problem is going to get eight times bigger over time, and still bigger than that. In fact, if other companies notice what eBay is doing and decide to save money by switching to open-source software, there's no telling how big a threat this could become for VMware.

Of course, none of this explains why eBay shares are tumbling. If eBay's saving money on software, shouldn't its shares be going up?

Well, sure -- they should. But any good vibrations eBay shareholders may be feeling from the VMware news are getting overwhelmed today by worries raised at analyst house Stifel Nicolaus. According to Stifel, Visa (NYSE: V  ) and MasterCard (NYSE: MA  ) plan to start charging new fees on card payments soon -- fees that may hurt profit margins at eBay's PayPal unit. Stifel is also wondering why PayPal has only managed to cobble together a 5% share of the mobile-payments market -- and plans to pose this question, as well as questions on the Visa and MasterCard problem, at eBay's "analyst day" presentation Thursday.

Foolish thought
If you ask me, neither of these developments is something investors need to worry about. The VMware excision is decidedly good news for eBay's profitability. The posing of hard questions by an analyst, meanwhile, shouldn't scare anyone. (To the contrary, we should welcome such critical thinking on Wall Street.)

What should worry investors is the fact that eBay shares cost more than 25 times earnings today, are even more expensive when valued on free cash flow, and yet are pegged for only a 15% growth rate. In short, the real reason investors should be selling the shares is that they cost too much.

The amount of data we store every year is growing by a mind-boggling 60% annually. To make sense of this trend and pick out a winner, The Motley Fool has compiled a new report called "The Only Stock You Need to Profit From the NEW Technology Revolution." The report highlights a company that has gained 300% since it was first recommended by Fool analysts but still has plenty of room left to run. To get instant access to the name of this company transforming the IT industry, click here -- it's free.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2330334, ~/Articles/ArticleHandler.aspx, 12/18/2014 6:56:57 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement