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December 7, 2000

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Subject:  Holly Becker Research Report/Downgrade
Author:  jrwong

Finally had a chance to read Holly Becker's (Lehman Bros.) research report on Ebay. I was curious what was said that dropped Ebay 20% on the Nov. 20th. Surprisingly there wasn't that much to it, not as much as you would imagine (sort of like finally seeing Hollywood Boulevard for the first time -- this? this is it?). It struck me as an honest attempt at evaluating Ebay, though, and she raises some good points.

If you look at what Ebay's reported ...

(in millions)   98Q3  98Q4  99Q1  99Q2  99Q3 99Q4  00Q1  00Q2  00Q3
                ----  ----  ----  ----  ---- ----  ----  ----  ----
Net Revenues    12.9  19.5    34  38.2  58.5 73.9  85.8  97.4 113.4
  Q/Q change           51%   74%   12%   53%  26%   16%   14%   16%
GMS              195   307   541   622   741  901  1150  1300  1400
  Q/Q change           57%   76%   15%   19%  22%   28%   13%    8%
Reg. Users       1.2   2.1   3.8   5.6   7.7   10  12.6  15.8  18.9
  Q/Q change           75%   81%   47%   37%  30%   26%   25%   20%
Auctions Hosted  9.2  13.6  22.9  29.4  36.2   41  53.6  62.5  68.5
  Q/Q change           48%   68%   28%   23%  13%   31%   17%   10%
you can see how she could have arrived at her pessimistic view of Ebay. Each measure shows slowing. As Bloomberg reports (1) Holly Becker doesn't see much prospect for growth and sees more expense for that growth. So why doesn't Ebay trade down to $10 to a still agressive P/E of 80? While there is a significant amount of unknowns allowing for the possibility for downside there's also a significant amount of unknowns for upside, especially when looking out 5 years or more.

As (2) and Bloomberg further reports (3) she believes insider selling and aggressive 2005 year $3 billion revenue projection raises red flags. Rounds of insider selling took place (I think) twice during 1999 and 3 times (so far) during this year, so that's nothing new and IMO shouldn't raise red-flags. What is new, and she doesn't note it, is the larger number of shares unloaded during this round of insider selling. I'm not bothered by the $3 billion/2005 projection. I believe there's still some growth left in the US (and we'll be watching the listing counts, the People's real-time metric and the original Delight-O-Meter -- not audited folks -- to see any evidence of slowing) and I believe UK and Germany are in the early phase of auction and internet use so I expect there to be much growth in those countries in the next couple of years. Combined they have half the US population and about a third of the US GDP. As I've noted before, transition to unmetered net access will accelerate growth since Ebaying requires a lot of time online. IMO and from some of what I've seen as well as financial reports there's no meaningful competition in either country. This and small amounts of revenue growth from various other sources (like and increased ad revenue) might get Ebay its 50% annual growth for the next two years.

Something else mentioned in the Bloomberg article was her expectation that Ebay would be acquired if the business slowed. However, the drop in share price from the likely suitors, AOL and Yahoo, rules out that possibility. (4) noted that she believed there was a takeover premium built into Ebay which now should be eliminated. I think that premium is long since gone.

Anyway, if you expected something rather surprising or expected a deep understanding of Ebay's business, I don't read that in the research report. In its 3 pages there's nothing that people don't already know or don't already think, suspect or realize, so I find it strange it would have sparked a (momentary) 20% loss of market capitalization. If you expect a solid and sensible view of Ebay's prospects, that can certainly be found in the research report.






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