The Day Ahead: Is QXL.com really the next eBay?

The surge of UK-based auction house QXL.com raised quite a ruckus after an analyst gave the stock a lofty price target and compared the company to a young eBay. By market close, it was a case of screaming shares and a few screaming investors.

Momentum happy investors pounced on QXL.com shares Thursday morning only to get torched by the afternoon. In London, QXL.com fell Friday morning on profit taking.

Before we get to the eBay comparisons, let's put Thursday's investor outrage to bed. When news of SG Cowen's $1,000 (£620) price target got out, investors predictably chased shares. American Depository Shares of QXL.com quickly zoomed to 117 3/8.

And then there was a collective "oops." As it turned out, SG Cowen analyst Tom Bock's report didn't account for a 3-for-1 stock split that was effective Thursday. Bock's $1,000 price target was actually $333, still well above QXL.com's current price. And Bock projected a 24-month price target. You mean QXL.com shares weren't going to $1,000 in one day?

Shares closed at 51 63/64, up 133 percent, but were well below the day's high. Between the high and low price of the day, a lot of folks got killed trading QXL.com.

Enter the conspiracy theories. Message board banter blamed SG Cowen, which noted it has co-managed an offering of QXL.com shares in the last three years, for pumping and dumping the stock.

Maybe these whining investors should have looked before they traded. How many of these one-day QXL.com fans even visited the site? A SG Cowen spokesman said the flap over the price target is a bit much. What's the difference? Bock's price target is well above the current price whether it's $1,000 or $333.

Instead of worrying about price targets, we think it's much more constructive to poke holes in the logic behind QXL.com's price target. Bock's logic goes like this: QXL.com is like eBay and offers consumer-to-consumer auctions and business-to-consumer auctions; therefore QXL.com should get eBay's current valuation in two years.

Bock reckons that QXL.com is a young eBay with a first mover advantage. Europe is about two years behind the U.S. when it comes to the Web. As Europe's Web population grows so will QXL.com.

The SG Cowen analyst has it right about the prospects in Europe. It's the QXL.com prospects, we're not so sure about. QXL.com is no eBay.

"Did we think two years ago that eBay would be a $25bn company?" wrote Bock in his report.

Nope, but that doesn't mean QXL.com can do what eBay did. The biggest reason QXL.com won't replicate eBay's success can be summed up in one word -- competition. QXL.com has first mover advantage, but will compete against eBay, Amazon.com, Yahoo!, CMGI's uBid and a host of business-to-business players in the US and abroad.

In addition, eBay honed its business model in relative secrecy. No one knew eBay was onto something huge until it had reached critical mass. By then, Amazon and Yahoo had little hope of catching eBay.

"EBay was able to develop under the world's radar," said Derek Brown, an analyst at W.R. Hambrecht. "It's a bit of a stretch to say eBay had no competition, but there was no real competition."

If QXL.com wasn't on the radar yesterday, it's there today. EBay and other companies are looking to port their U.S. product abroad. Yahoo is the master of this approach and its Japan auction sites has gained traction, officials said.

The financial comparisons between QXL.com and eBay are also flimsy.

"In the December 1997 quarter, eBay generated as much in revenues as QXL.com did in the December 1999 quarter, though we believe QXL is at a disadvantage in that a smaller percentage of the European population is online now than in the U.S. two years ago," wrote Bock.

"If QXL.com does hold on to its leading position in the space and on the longer term successfully expands beyond Europe, then we believe due to the size of the potential market, QXL.com could actually achieve valuations in excess of $25bn," said Bock.

Bock's analysis includes a lot of "ifs." If the Europe takes to the Web and embraces e-commerce and QXL.com can defend it's turf, then it will become eBay-like.

Although QXL.com's revenue may match a young eBay, the bottom line isn't even close. EBay reported a profit before it even went public. To this day, a pre-IPO profit is rare for Internet companies.

QXL.com is public now and won't see a profit until at least 2003. Bock estimates QXL.com will lose a split-adjusted $1.47 a share in fiscal 2000, $1.03 in fiscal 2001, and $1.21 in 2002.

Until QXL.com discovers a path to profitability, it's no eBay contender.

QXL.com has a partnership with ZDNet UK

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