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Thursday, August 24, 2006

eBay's Longest Yard

eBay's shares were downgraded again. Piper Jaffray cut it to "underperform" and dropped their price target to $25. The stock trades just below $26 now, so the price target was a real insult. The analyst was quoted at MarketWatch as saying: "Despite eBay's effort over the past two quarters to rebalance the markeplace and regain growth, we believe the core problem is with lack of activity from buyers, not sellers, and thus eBay's efforts are unlikely to bear fruit."

With a 52-week high of almost $49, the stock is now down by nearly half, and the price to sales ratio has dropped from 14 to a little over 7. Google is at almost 14 now.

Morningstar takes the other side of the eBay argument. The stock and fund rating company put eBay's fair value at $45. Morningstar sees US growth of 20% for eBay. They also like the idea that eBay is raising fees because it is likely to push out some of the marginal business but not the core sellers.

Morningstar likes eBay's 24% growth overseas, but is downright in love with PayPal, which grew by 39% in the last quarter. And, in a slap at the world's largest search company, Morningstar makes the following point"We think the perceived threat from the recently launched Google GOOG Checkout has been significantly overblown." Well, well, that is plain enough.

eBay is a company with over $2 billion in cash and almost that much in free cash flow per year. The company's marke cap is $36 billion, about 16 times free cash flow. Growth of revenue for the trailing 12 months compared to the company's fiscal (December 31) is 15%.

For all of that relative financial success, $26 seems like too reasonable a price.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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