Not-so-great expectations

By DAVID MOON, Moon Capital Management
January 30, 2005


Like every other parent, I have exceptional children. They're smart, mature and healthy. My four-year-old son is the first member of the Moon family to have a washboard stomach. His twin sister is one step away from being able to calculate second derivatives of polynomial equations.

Imagine my disappointment when Bethany refused to sit quietly through an Alison Krauss concert. After the third song, I carried her from the chamber of the Tennessee Theatre and took a cab home, leaving my wife and Wheeler to enjoy the show.

She cried. A bunch. But after getting it out of her system, daddy and daughter had a great time at home alone. If we had never gone to the concert, I would have thought it was a perfect evening. So why wasn't it a perfect evening anyway?

Because my expectations were too high. My measuring stick was all wrong. I was the immature person that night, not her.

There is a point to this.

On January 19th, eBay announced fourth quarter profits that were 50 percent higher than a year ago. Revenues increased 44 percent, slightly topping analysts' expectations. International sales increased 64 percent. The company expects first quarter 2005 revenues in excess of $1 billion, up from fourth quarter 2004 revenues of $935.8 million. For the entire year, eBay raised its revenue estimate.

In reaction to this news, eBay shares declined 24 percent. Investors were disappointed that eBay reported earnings that were a single penny below the consensus Wall Street analyst estimate. Analysts were accustomed to eBay always exceeding their estimates. In a single day, investors reduced the value of eBay by $17 billion ' even though eBay met its own externally announced estimates and increased its projections for next year.

But wait a minute. The value of eBay didn't decline $17 billion. Earnings were up. Revenues were up. The company increased its expectations about 2005. If the value of eBay changed at all, it increased, not decreased. The perception about eBay changed, not its value. And the perception changed because investors had unrealistic expectations to begin with.

Before January 19th, eBay shares traded hands at $107 a share. In the previous 12 months, the company generated $1.14 a share in earnings. Investors were paying almost $100 for each dollar's worth of the company's earnings. eBay is a great company with a business model that is so simple it is genius. But the business isn't worth 100 times earnings.

If you own eBay and lost a bunch of money last week, don't get mad at the company; get mad at yourself. Your expectations were unrealistic. It's still a great company. Realize there is a difference between the price of a stock and its value. Logic suggests that if you liked eBay at $107 a share, you ought to love it at $79 a share. But too often, logic has little to do with expectations ' both with investors and parents.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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