eBay bids to win China battle

Are ebay's days of cheap and easy growth behind it?

Expanding at a rapid clip since its initial public offering in 1998, the online marketplace also stayed ahead of Wall St's expectations - until a profit miss last month cost eBay a fifth of its market value.

The auctioneer also failed to raise its targets, bucking its usual trend and forcing analysts and investors to reset assumptions about the dot-com star, whose net income last year was nearly 900 times what it was in 1997.

"The underlying question is, has growth for eBay fundamentally become more expensive to generate than in the past?" said American Technology Research analyst Mark Mahaney.

Much of eBay's early growth came via word of mouth, but now the company is having to pay to grow.

It has increased advertising in Germany and the United States, where some sellers are complaining about rising fees and raising fears that sellers could abandon eBay altogether or seek alternatives to the site, which virtually dominates the US market.

Meanwhile, the company is ploughing investment into Europe and Asia, where competitors are more likely to await.

Eighteen months ago, Wall St estimated long-term earnings growth of 42 per cent. But such expectations have steadily cooled to current estimates for 33 per cent growth, according to Reuters Estimates.

Before eBay issued its 2005 forecast on January 19, shares had traded at more than 60 times analysts' estimates for per-share earnings excluding items. Shares are now trading at about 50 times analysts' 2005 earnings target.

"It comes down to numbers ... Do you own the stock now based on the belief that growth will materialise and that 2006 is the start of the good times?" said Janco Partners analyst Martin Pyykkonen, referring to eBay's overseas growth plans.

eBay, conceived as a platform for trading Pez confectionery dispensers and other trinkets, now peddles everything from tractors and trading cards to vintage cars and clothes.

Last month, it raised 2005 investment goals to US$300 million ($432 million) from US$200 million.

About US$200 million of that will go to expand PayPal, eBay's payment service. The remaining US$100 million is earmarked for China, where the online auction market is young - and brutally competitive.

eBay landed too late in Japan, trailing rival Yahoo.

"In many ways China represents one of the most important opportunities this company faces today," eBay chief financial officer Rajiv Dutta said recently.

In July 2003, eBay bought early China market leader EachNet, which holds a slim lead over local site TaoBao and a big lead over Yahoo's joint-venture with Sina.com .

China's online auction market was about US$435 million last year and is expected to grow to US$725 million in 2005, according to Shanghai iResearch.

EBay EachNet claimed just over half of that business.

By next year, investors should know how eBay's new investments in Europe and Asia are faring. China is regarded as much more of a free-for-all.

- Reuters