June 14, 2007
Aaron M. Kessler, CFA, Sr Research Analyst
650 838-1434, email@example.com
eBay Inc. (EBAY - $31.48)
Judy C. Tzeng, Research Analyst Market Perform Volatility: Medium
650 838-1348, firstname.lastname@example.org
Paul J. Bieber, Research Analyst Incrementally Cautious Following Meeting With
650 838-1378, email@example.com eBay Powersellers and Partners
Piper Jaffray & Co.
Reason for Report: • On Wednesday, we hosted a dinner with eBay Powersellers and Partners
Change in Price Target ahead of the eBay Live User Conference which begins today in Boston
Changes Previous Current • Unrest in the marketplace due to: buyer demand and buyer experience, trust
and safety, eBay's lack of responsiveness to sellers, and lack of investments
Rating -- Market Perform
that eBay is making to address seller concerns.
Price Tgt $39.00 $34.00
• Concerns manifested in slower listings growth, lower buyer activity, and
FY07E Rev (mil) -- $7,485.0
sellers increasingly exploring other channels.
FY08E Rev (mil) -- $8,946.0
• Listings and revenues tracking below our Q2 estimates
FY07E EPS -- $1.10
• Maintain MP; Lower PT to $34 (22x 2008E PF EPS)
FY08E EPS -- $1.34
Takeaways from Dinner with eBay Powersellers and Partners. On Wednesday,
52 Week High: $35.41
we hosted a dinner in Boston with the heads of PeSA (Professional eBay
52 Week Low: $22.83
Powersellers Association), ChannelAdvisor, as well as eBay Powersellers. Based
12-Month Price Target: $34.00
on our discussion, we believe there is a lot of unrest in the marketplace, with major
(22x 2008 PF EPS)
concerns from eBay Powersellers on several fronts, including: buyer demand and
Shares Out (mil): 1,384.0
buyer experience, trust and safety, eBay's lack of responsiveness to sellers, and lack
Market Cap. (mil): $43,568.3
of investments that eBay is making to address seller concerns. These concerns are
Avg Daily Vol (000): 14,667
being manifested in slower growth of seller listings, lower buyer activity, and
Book Value/Share: $8.10
sellers increasingly exploring other channels such as Amazon and their own
Cash Per Share: $2.14
branded sites. While eBay has acknowledged some of these issues, our discussions
Est LT EPS Growth: 16%
indicated eBay has been very slow to react, with little progress made year to date.
P/E to LT EPS Growth (FY07): 1.8x
(see page 2 for details).
Est Next Rep Date: 07/18/2007
Fiscal Year End: Dec
Incrementally Cautious; Maintain MP but Lowering PT to $34. Given our
Rev (mil) 2006A 2007E 2008E increased concerns, we are incrementally more cautious on eBay shares. We would
Mar $1,390.4A $1,768.0A $2,121.0E also note that listings are tracking 3% below our estimate for the quarter with total
Jun $1,410.8A $1,796.0E $2,151.0E listings through week 10 down 3% q/q vs. our -0.3% estimate - based on our
Sep $1,448.6A $1,824.0E $2,190.0E listings count, we believe revenues are tracking towards the lower end of the
Dec $1,719.9A $2,097.0E $2,484.0E company guidance of $1.75-$1.8B and below our $1.8B estimate. Given our more
FY $5,969.7A $7,485.0E $8,946.0E cautious stance, we are lowering our price target from $39 (24x '08 PF EPS) to $34
CY $5,969.7A $7,485.0E $8,946.0E (22x 2008 PF EPS). We believe a lower multiple is justified given our increased
concerns over the health of the core eBay business. While the eCommerce group
FY RM 7.3x 5.8x 4.9x
trades at 30x 2007 PF EPS, we believe a lower multiple is justified given the lower
CY RM 7.3x 5.8x 4.9x
growth prospects for eBay (we estimate mid-teens long-term earnings growth for
EPS 2006A 2007E 2008E eBay vs. 20%-plus growth for the group). We would become more constructive as
Mar $0.17A $0.27A $0.32E we see evidence that eBay is addressing some of these concerns.
Jun $0.17A $0.26E $0.32E INVESTMENT RECOMMENDATION:
Sep $0.20A $0.26E $0.32E We maintain our Market Perform rating and lower our PT from $39 (24x 2008E PF
Dec $0.25A $0.31E $0.38E EPS) to $34 (22x 2008E PF EPS) based on our lower multiple.
FY $0.79A $1.10E $1.34E
CY $0.79A $1.10E $1.34E
RISKS TO ACHIEVEMENT OF TARGET PRICE:
Risks include multiple expansion, reacceleration in growth, and decreasing
FY P/E 39.8x 28.6x 23.5x customer acquisition costs.
CY P/E 39.8x 28.6x 23.5x
EPS estimates are GAAP PF EPS for 2007 and
. eBay Inc. is the world's largest online trading community.
2008 are $1.36 and $1.61.
Piper Jaffray does and seeks to do business with companies covered in its research reports. As a result, investors should be
aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider
this report as only a single factor in making their investment decisions. This report should be read in conjunction with
important disclosure information, including an attestation under Regulation Analyst certification, found on pages 5 - 7 of this
report or at the following site: http://www.piperjaffray.com/researchdisclosures.
Customers of Piper Jaffray in the United States can receive independent, third-party research on the company or companies
covered in this report, at no cost to them, where such research is available. Customers can access this independent research
by visiting piperjaffray.com or can call 800 747-5128 to request a copy of this research.
eBay Inc. Page 1 of 7
June 14, 2007
Takeaways from Dinner with eBay Powersellers and Partners. On Wednesday, we hosted a dinner in Boston with the heads of
PeSA (Professional eBay Powersellers Association), ChannelAdvisor, as well as eBay Powersellers. Based on our discussion, we
believe there is a lot of unrest in the marketplace, with major concerns from eBay Powersellers on several fronts, including: buyer
demand and buyer experience, trust and safety, eBay's lack of responsiveness to sellers, and lack of investments that eBay is making to
address seller concerns. These concerns are being manifested in slower growth of seller listings, lower buyer activity, and sellers
increasingly exploring other channels such as Amazon and their own branded sites. Below we highlight the key takeaways from our
Buyer Demand & Buyer Experience Are Key Concerns. Based on our conversations with eBay Powersellers and eBay Partners, it
was clear that the key concerns are buyer demand and the buyer experience. The key issues centered around: 1) search and navigation
2) marketplace fraud 3) stale user interface. These issues are manifesting in low growth of active users (worldwide active users LTM
on eBay increased just 10% y/y in Q1 and active users/registered users at 32% is down 4% over the last year). We believe active user
growth in the U.S. was much lower than the overall 10% growth that was reported and sellers believe that active users in the quarter
were down materially from Q4 levels. While eBay has acknowledged that buyer demand has become a major issue, the sellers
indicated that eBay has done little to address this thus far. The Powersellers did indicate that eBay is increasingly addressing trust and
safety issues such as second chance buyer fraud, although buyers/sellers constantly find new ways to deceive eBay users. Another
example is that on eBay there is no way for buyers to sort for sellers that allow returns in contrast to Amazon that requires sellers to
accept returns. Essentially, eBay has not focused on the buyer experience enough over the past few years, and this is being manifested
now in waning buyer demand on eBay. On the positive side, there is a lot of room for eBay to make changes and the changes needed
are not overly complex.
eBay Not Responsive Enough to Powersellers. The Powersellers indicated that eBay does not sufficiently listen to their concerns.
While eBay has indicated that they are making changes (i..e improved search & navigation), eBay has been very slow in making
changes and based on our discussions no significant changes have been made in Q2. Another complaint was that eBay is not nimble
enough and is too bureaucratic to make changes in a timely manner – for a while eBay had approximately 20 people that had to
approve changes and new ideas would often get voted down by some constituency. The Powersellers also felt that eBay has become
distracted on other initiatives over the last couple of years that are not contributing to the health of the core marketplace business (i.e.
Skype, eBay China, off-eBay PayPal). Further, the sellers indicated that the loss of Jeff Jordan was a big loss as he was one of the key
management personnel at eBay looking to address seller concerns.
Sellers Increasingly Exploring Alternate Channels. While eBay remains the primary channel for most sellers, given the slowdown
in listings over the last year sellers are increasingly exploring alternate channels, including Amazon as well as their own branded sites.
Specifically, in the media segment, Amazon is absorbing the sellers on eBay that effectively got priced out of the market. Additionally,
over the last year, there has been a significant increase in the number of branded eCommerce sites among Powersellers (PeSA
indicated that over 75% of members now run their own sites today). ChannelAdvisor also is increasingly focused on the non-eBay
channel with roughly half of its business today coming off eBay vs. almost all eBay a couple of years ago. We also note that other
Internet companies including Yahoo, Google, and Amazon, are increasingly recruiting eBay Powersellers. To this point, Powersellers
are increasingly utilizing Amazon for listings but are also looking at Amazon's third party services, including its fulfillment services.
eBay Needs Segmented Pricing and Policies. One of the key concerns with the eBay marketplace is that they apply changes evenly
across all sellers, irrespective of the categories they are in. Hence, a hike in store listings fees for low priced low velocity items such as
books and movies impacts these sellers much more than sellers of higher priced and higher velocity items. The sellers also believe that
the increase in store listings fees last year (from $0.02 to at $0.05 minimum) is eroding the long-tail value proposition of eBay with
many sellers in the long-tail migrating to other channels with no listings fees (e.g. Amazon).
Conversions Up Due to Mix Shift, Not Due to Improvement in Buyer Activity. The recent increases in conversion rates (which has
translated into higher revenue per listing) is mainly being driven by a mix shift in listings (shift away from lower velocity listings such
as media segment). The fact that buyer activity has slowed as evidenced by lower active user growth further supports the notion that
revenue per listing is being driven by a mix shift. We believe that once eBay anniversaries the higher prices (in 3Q07), it will become
increasingly challenging to increase revenue per listing.
Perception of eBay as Discount Channel Could Make It Difficult to Penetrate In Season Retail. The Powersellers indicated that
eBay has a hard time selling products today at full retail pricing given the perception that eBay is a discount channel as well as buyer
concern over fraud in the marketplace, especially on higher priced goods. Hence, sellers are able to sell goods at a significant premium
off-eBay vs. what they could get on eBay (typically 30-50% higher). Additionally, the sellers indicated that eBay express is not the
right platform for new goods and should be branded separately from eBay if eBay truly wants to operate a new goods site. The sellers
also believed there has been little synergies between eBay and Shopping.com.
eBay Inc. Page 2 of 7
June 14, 2007
eBay Needs to Increase Investments in the Marketplace. The general view from our meeting is that eBay has underinvested in its
core marketplace over the past few years and has been slow to innovate while competitors are investing heavily in new products and
initiatives (especially Google and Amazon). Sellers do not believe that eBay is a technology company and hence much slower to
innovate than its competitors - an example was the speed at which Google developed its Checkout product and continuously addressed
merchants input while PayPal has been very slow to make changes. The sellers believe that eBay needs to increase investments in the
business, including user interface, trust and safety, customer service, user interface, and search. While this would likely lower eBay's
profits near-term, they believe it would ultimately lead to an improved marketplace experience and increased demand.
eBay Heavily Reliant on Google AdWords. While eBay removed its ads from Google on Wednesday (we believe in reaction to
Google's Checkout Party which has subsequently been pulled), our discussions suggest that eBay's buyer traffic significantly decreased
due to the stoppage of use for Google AdWords. Hence, we believe eBay remains heavily reliant on Google for traffic and it is not an
option for eBay to remove listings from Google long term.
Are there any Positives? While Powersellers see several structural issues with eBay today, all of the Powersellers have a vested
interest in the eBay marketplace doing well. eBay is still viewed as having a dominant eCommerce marketplace, a strong value
proposition for buyers, and a low cost customer acquisition channel for sellers. Furthermore, the Powersellers see a lot of opportunity
for eBay to improve the overall health of the marketplace assuming eBay addresses some of the key issues mentioned above,
especially the demand side of the marketplace. We would also become more constructive with increased signs that eBay is addressing
Total Listings down 3.1% q/q QTD vs. our -0.3% estimate. Our analysis of daily new listings across 15 countries through Week 10
(June 10, 2007) indicates that eBay's 2Q07 QTD Listings are down 3.1% vs. 1Q07 QTD (assuming average weekly listings). For
2Q07, we are estimating a 0.3% q/q decline. Our listings analysis indicates that the U.S. listings have declined 2.3% vs. our estimate of
-2% q/q and international listings are down 3.8% vs. our estimates of a 1% q/q increase. We estimate Germany has declined 9.3% q/q,
UK has declined 3.6% q/q, and ROW has increased 3.6% q/q. Our analysis also indicates core listings are down 3.7% q/q while store
listings are flat q/q.
eBay Inc. Page 3 of 7
June 14, 2007
Important Research Disclosures
Rating and Price Target History for: eBay Inc. as of 06-13-2007
10/21/04 01/20/05 02/11/05 04/21/05 07/21/05 01/19/06 04/20/06 05/05/06 07/07/06 07/20/06 08/24/06
OP:$50.5 MP:$50.5 MP:$48 MP:$40 MP:$43 MP:$44 MP:$41 MP:$39 MP:$31 MP:$30 UP:$25
Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1
2005 2006 2007
01/25/07 04/05/07 04/19/07
MP:$30 MP:$37 MP:$39
Created by BlueMatrix
Notes: The boxes on the Rating and Price Target History chart above indicate the date of the Research Note, the rating, and the price target. Each box
represents a date on which an analyst made a change to a rating or price target, except for the first box, which may only represent the first Note written during
the past three years.
I: Initiating Coverage
D: Discontinuing Coverage
S: Suspending Coverage
R: Resuming Coverage
T: Transferring Coverage
SB: Strong Buy (effective 01/12/04, Equity Research eliminated the SB rating)
MP: Market Perform
NA: Not Available
UR: Under Review
GP On: Listed on one of the Guided Portfolios maintained by Piper Jaffray
GP Off: Removed from the Guided Portfolios maintained by Piper Jaffray
Distribution of Ratings/IB Services
IB Serv./Past 12 Mos.
Rating Count Percent Count Percent
BUY [OP] 351 57.64 98 27.92
HOLD [MP] 238 39.08 24 10.08
SELL [UP] 20 3.28 0 0.00
Note: Distribution of Ratings/IB Services shows the number of companies in each rating category from which Piper Jaffray and its affiliates received
compensation for investment banking services within the past 12 months. NASD and NYSE rules require disclosure of which ratings most closely correspond
with "buy," "hold," and "sell" recommendations. Accordingly, Outperform corresponds most closely with buy, Market Perform with hold, and Underperform
with sell. Outperform, Market Perform and Underperform, however, are not the equivalent of buy, hold or sell, but instead represent indications of relative
performance. See Rating Definitions below. An investor's decision to buy or sell a security must depend on individual circumstances.
eBay Inc. Page 5 of 7
June 14, 2007
Important Research Disclosures
Analyst Certification — Aaron M. Kessler, CFA, Sr Research Analyst
The views expressed in this report accurately reflect my personal views about the subject company and the subject security. In addition, no part of my
compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report.
Piper Jaffray was making a market in the securities of eBay Inc. at the time this research report was published. Piper Jaffray will buy and sell eBay Inc.
securities on a principal basis.
Affiliate Disclosures: This report has been prepared by Piper Jaffray & Co. or its affiliate Piper Jaffray Ltd., both of which are subsidiaries of Piper
Jaffray Companies (collectively Piper Jaffray). Piper Jaffray & Co. is regulated by the NYSE, NASD and the United States Securities and Exchange
Commission, and its headquarters is located at 800 Nicollet Mall, Minneapolis, MN 55402. Piper Jaffray Ltd. is registered in England, no. 3846990, and
its registered office is 7 Pilgrim St., London, EC4V 6LB. Piper Jaffray Ltd. is authorised and regulated by the UK Financial Services Authority, entered on
the FSA's register, no. 191657 and is a member of the London Stock Exchange, and its headquarters is located at One South Place, London, EC2M
2RB. Disclosures in this section and in the Other Important Information section referencing Piper Jaffray include all affiliated entities unless
Piper Jaffray research analysts receive compensation that is based, in part, on overall firm revenues, which include investment banking revenues.
Investment Opinion: Investment opinions are based on each stock's return potential relative to broader market indices, not on an absolute
return. The relevant market indices are the S&P 500 and Russell 2000 for U.S. Companies and the FTSE Techmark Mediscience index for
• Outperform (OP): Expected to outperform the relevant broader market index over the next 12 months.
• Market Perform (MP): Expected to perform in line with the relevant broader market index over the next 12 months.
• Underperform (UP): Expected to underperform the relevant broader market index over the next 12 months.
• Suspended (SUS): No active analyst opinion or no active analyst coverage; however, an analyst investment opinion or analyst coverage
is expected to resume.
• Volatility Rating: Our focus on growth companies implies that the stocks we recommend are typically more volatile than the overall stock
market. We are not recommending the "suitability" of a particular stock for an individual investor. Rather, it identifies the volatility of a
• Low: The stock price has moved up or down by more than 10% in a month in fewer than 8 of the past 24 months.
• Medium: The stock price has moved up or down by more than 20% in a month in fewer than 8 of the past 24 months.
• High: The stock price has moved up or down by more than 20% in a month in at least 8 of the past 24 months. All IPO stocks
automatically get this volatility rating for the first 12 months of trading.
eBay Inc. Page 6 of 7
June 14, 2007
Other Important Information
The material regarding the subject company is based on data obtained from sources we deem to be reliable; it is not guaranteed as to accuracy and
does not purport to be complete. This report is solely for informational purposes and is not intended to be used as the primary basis of investment
decisions. Because of individual client requirements, it is not, and it should not be construed as, advice designed to meet the particular investment needs
of any investor. This report is not an offer or the solicitation of an offer to sell or buy any security. Unless otherwise noted, the price of a security
mentioned in this report is the market closing price as of the end of the prior business day. Piper Jaffray does not maintain a predetermined schedule for
publication of research and will not necessarily update this report. Piper Jaffray policy generally prohibits research analysts from sending draft research
reports to subject companies; however, it should be presumed that the analyst(s) who authored this report has had discussions with the subject company
to ensure factual accuracy prior to publication, and has had assistance from the company in conducting diligence, including visits to company sites and
meetings with company management and other representatives.
This report is published in accordance with a conflicts management policy, which is available at http://www.piperjaffray.com/researchdisclosures.
Notice to customers in Europe: This material is for the use of intended recipients only and only for distribution to professional and institutional
investors, i.e. persons who are authorised persons or exempted persons within the meaning of the Financial Services and Markets Act 2000 of the
United Kingdom, or persons who have been categorised by Piper Jaffray Ltd. as intermediate customers under the rules of the Financial Services
Notice to customers in the United States:This report is distributed in the United States by Piper Jaffray & Co., member SIPC and NYSE, Inc., which
accepts responsibility for its contents. The securities described in this report may not have been registered under the U.S. Securities Act of 1933 and, in
such case, may not be offered or sold in the United States or to U.S. persons unless they have been so registered, or an exemption from the registration
requirements is available. Customers in the United States who wish to effect a transaction in the securities discussed in this report should contact their
Piper Jaffray & Co. sales representative.
This material is not directed to, or intended for distribution to or use by, any person or entity if Piper Jaffray is prohibited or restricted by any legislation or
regulation in any jurisdiction from making it available to such person or entity.
This report may not be reproduced, re-distributed or passed to any other person or published in whole or in part for any purpose without the prior consent
of Piper Jaffray & Co.
Additional information is available upon request.
Copyright 2007 Piper Jaffray & Co. and/or Piper Jaffray Ltd. All rights reserved.
eBay Inc. Page 7 of 7