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Best of 2005: Why "Bad" People Sell Good Earnings


"Wait a minute...what did you start to say about Santa?!"


Editor's Note: This article was published on 4/21/2005

Being the grown-up is tough. The right to legally drink, vote and pay outrageous tuitions for toddlers all come at a stiff, non-financial price. We have to watch (and wait for) youthful belief in magic turn into cynical understanding of truth.

The easter bunny is a fraud. The guy at the department store reeking of gin and "kid" isn't really Santa. Speaking of Santa...

It's heartbreaking.

I couldn't help but think of life's bitter-sweet symphony today as I watched eBay's (EBAY) stock open strong then rollover, despite the company "beating estimates and raising guidance". You can almost hear the foot-stomping tantrums of disillusioned e-Bay employees from here.

"We're down 50% for the year al-reeaaaaaaaad-y" they moan. "We can't go down more... not after raaaaaai-sing.... not on a day like thissssssssssss."

eBay is at the awkward stage. The stock is exploding with hormones, battling insecurity and is learning how the world works the hard way, as all teens must.

The horrible, inexorable truth is that growth must eventually slow. It happens to everyone, even the best of them. Wal-Mart (WMT), Microsoft (MSFT), Cisco (CSCO) and every specialty retailer that has ever existed. No company is spared from the hand of this natural law. The hard, cold truth is that it's happening to eBay right now.

There is little the company can do to stop this, in the larger (annual) picture. The best outcome is that earnings continue to grow rapidly enough to make the multiple compression hurt less. That way the time component of the pain is lessened as the stock goes from "Hyper-growth expensive" (p/e's in the triple-digits) to "rapid growth pricey" (e-Bay's current trailing p/e of 40 works as an example) to "average growth fair-ishly priced" (teens p/e).

e-Bay is too big to be an M&A candidate. They are too big to grow 100% per year. If they can make their nascent markets (China, Pay-Pal abroad) work the way they hope, the stock may stop free-falling. In that case the stock may pull a Wal-Mart. Choppy, volatile, dead money for years and years.

If the company can't make those markets work, things get worse for the stock. Put it this way, according to Bloomberg, analysts are still assuming a long-term growth rate of 31% for eBay. Core revenues are growing at 17% year over year in the quarter just reported.... of course the stock could go lower.

Like I said, it's hard being the grown-up, having to watch the eBay kids learn this stuff. Maybe they could help their company by pitching Disney (DIS) the film rights.

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