Investors dump eBay on earnings letdown

BULLISH comments about prospects in China were not enough to stop investors from wiping almost $8bn (£4.2bn), or 12%, off the value of online auctioneer eBay in after-hours markets when the company missed Wall Street's earnings expectations for the first time in three years.

Investors might have forgiven the earnings miss but that bad news was compounded by eBay lowering its profit forecasts going into 2005.

For the fourth quarter, eBay reported net profit up 44% to $205.4m, or 30 cents a share, from $142.5m a year earlier.

Excluding special items, the company made $226m. Analysts expected 34 cents per share. Revenue for the period was $935.8m, up 44% from $648.4m in 2003.

For the current first quarter, eBay forecasts revenue of between $1.01bn and $1.03bn and earnings excluding exceptional items of between 34 cents and 35 cents a share compared with the analysts' view of about 40 cents a share.

The group said key holiday sales got off to a slow start in its core US and German markets, and the weak dollar unexpectedly hurt results, although the company beat its own projections.

It said it decided to increase investments this year in key areas, particularly China and its online payment subsidiary PayPal, by $100m to $300m. It will spend about 2% of its expected global revenue - $100m - in China.

'In our judgment, this is the right thing to do right now,' chief executive Meg Whitman told analysts. Whitman would not be drawn on when eBay expects to make money from its business in China, where there is great potential but also stiff competition.

The company has been recruiting staff in the country, where PayPal is a key for its expansion. A lack of online payment methods has held back the growth of services such as eBay, which entered the Chinese market by acquiring established player Eachnet.

Some local companies are looking at the problem in a different way. Shanghai-based SmartPay Jieyin, a leader in the emerging field, is setting up a payment system using mobile phones. It already allows customers to pay their phone bills by that method, and there are no guarantees that the Chinese will favour the US and UK model of online payments.

Competition could derail eBay's Chinese plans and deny it the virtual market monopoly it has in the US and UK, which has made it something of a safe haven among internet stocks.