Can an eBay Without Auctions Survive?

06/17/2008 12:00 am EST

Focus: STOCKS

Joseph Hargett

Financial Analyst, Schaeffer's Investment Research, Inc.

Joseph Hargett of Schaeffer’s Investment Research says eBay is deserting its roots, creating ill will, and perhaps setting the stock up for disappointment.

Online auction house eBay (Nasdaq: EBAY) is in trouble, and a recent article from BusinessWeek ("Auctions on eBay: A Dying Breed," June 3rd) underscores the identity crisis swirling around the company. According to eBay auctioneer Bruce Henderson, "The auctions are nothing like what they once were... They won't ever come back."

The article notes that many consumers would rather pay a fixed price for an item than "goof around" in an auction. For eBay, this translated into a meager first-quarter rise in revenue of just 14%, compared to Amazon.com's sales surge of 37% for the quarter.

But eBay executives are not resting on their laurels, and have aggressively moved into the "Buy It Now" service, by favoring one-click shopping with recent price adjustments. The move comes with good reason, as "Buy It Now" sales are growing at a 22% annual pace. "The bloom is well off the rose with regard to the online-auction thing," says Tim Boyd, an analyst with American Technology Research.

Not everyone is happy with the new fee structures at eBay. "Everybody is mad because they feel that this company got built on them, and when eBay felt that they no longer needed them, they tried to get rid of them," says Maggie Dressler, an eBay seller since 2001. "It is deplorable."

eBay management may believe they are on to something with their focus on "Buy It Now" sales, but at what point does the company become just another Amazon.com (Nasdaq: AMZN) clone? Auctions are what built eBay, and they are what define eBay as a unique online marketplace. Investors seem to have realized this to some degree, as the stock has declined more than 12% so far in 2008, easily outpacing the Standard & Poor’s 500 index's loss of roughly 7%. Following a brief respite, selling pressure on the shares has returned with such fervor that EBAY breached key round-number support at the $30 level in May. (It closed below $29 Monday—Editor.)

The sentiment picture isn't any rosier. While options players are piling into put contracts, the stock's Schaeffer's put/call open interest ratio ranks in the 60th percentile of its annual range. This reading indicates that pessimism has ample room to grow among speculative investors, leaving the door open to additional selling pressures.

What's more, Zacks.com reports that ten of the 18 analysts following eBay rate the shares a Buy or better. With the company increasing fees on its auctioneering base of customers, I can't help but think that the core business will continue to suffer. I also can't help but wonder what these bullish analysts will think if eBay’s auction business continues to fade as the company shifts toward the Amazon.com model of fixed pricing. Downgrades from the brokerage bunch are the last thing that eBay shares need at the moment.

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