eBay Misses Estimates By a Penny a Share, Stock Plummets

It's earnings season on Wall Street again, and the financial reports are coming out that prove many analysts missed their calling in the custodial services. Others merely prove that markets are not driven by supply and demand but rather greed and fear. Above all, eBay’s results provide a textbook example of why markets shouldn’t be trusted blindly. Net profits for the quarter were up 44% over last year, and the stock fell 12% on the news.

Now, eBay hasn’t been playing games with revenues, or anything Enron-like as far as anyone knows. Its revenues for the quarter ended December 31, 2004 were $935.8 million, up from $648.4 million for the same period of 2003 – largely thanks to the contribution of PayPal. Net profits on that were $205.4 million, up from $142 million in 2003. Put another way, the company earned 33 cents per share for the quarter. But Wall Street expected 34 cents per share. In after-hours trading, the stock dropped to $91.01 from the NASDAQ close of $103.05 – 12% in an hour or so. And the NASDAQ close represented a 3% dip.

What the sell-off says is that a great many traders are a panicky bunch. With 680 million fully diluted shares, a penny is rather a lot in aggregate. On the other hand, missing a 34 cent estimate by 1 cent is a margin of error that most opinion polls would find pretty good. Most scientists accept a 5% error in their work – although it does annoy a lot of the good ones.

It also proved that after-hours trading isn’t necessary a good idea. The more participants there are in the market, the closer it comes to “perfect” market conditions. In general, larger volumes will reduce volatility, and that will result in a more rational price. Fewer traders means less liquidity and greater volatility.

Even less logical was the continued sell off yesterday, with the market dropping eBay stock to $81.40 just after 10 am. But the after-hours pricing tripped stop-loss orders, and there was heavy selling the morning after the night before. This means that in 24 hours eBay lost close to a quarter of its value – on profits 44% higher than last years’ fourth quarter.

So, the next time someone suggests that the market knows best, several grains of salt are needed. Often, the market knows nothing. eBay is the same company today that it was Tuesday. Either it was over-valued on Tuesday, or it’s under-valued today – or a combination of both. But the point is that markets are not about real value, but rather people’s perceptions of reality. And those are notoriously unpredictable.

© Copyright 2005 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.

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