eBay Shares Plunge Ahead of Thursday "Analyst Day"
News that online auctioneer eBay has decided to excise VMware software that runs storage in its servers and replace it with free, open-source OpenStack software sent shares of VMware tumbling almost 5% in Monday trading. But the news isn't doing eBay stock any favors, either.
According to a report published on Business Insider today, eBay and its PayPal subsidiary have begun removing VMware virtualization software from about 10,000 servers -- the first stage in a longer-term effort to switch over to OpenStack on all 80,000 servers running in their data centers.
This is obviously bad news for VMware. The company's about to lose software licensing fees on 10,000 pieces of hardware -- and the problem is going to get eight times bigger over time, and still bigger than that. In fact, if other companies notice what eBay is doing and decide to save money by switching to open-source software, there's no telling how big a threat this could become for VMware.
Of course, none of this explains why eBay shares are tumbling. If eBay's saving money on software, shouldn't its shares be going up?
Well, sure -- they should. But any good vibrations eBay shareholders may be feeling from the VMware news are getting overwhelmed today by worries raised at analyst house Stifel Nicolaus. According to Stifel, Visa and MasterCard plan to start charging new fees on card payments soon -- fees that may hurt profit margins at eBay's PayPal unit. Stifel is also wondering why PayPal has only managed to cobble together a 5% share of the mobile-payments market -- and plans to pose this question, as well as questions on the Visa and MasterCard problem, at eBay's "analyst day" presentation Thursday.
If you ask me, neither of these developments is something investors need to worry about. The VMware excision is decidedly good news for eBay's profitability. The posing of hard questions by an analyst, meanwhile, shouldn't scare anyone. (To the contrary, we should welcome such critical thinking on Wall Street.)
What should worry investors is the fact that eBay shares cost more than 25 times earnings today, are even more expensive when valued on free cash flow, and yet are pegged for only a 15% growth rate. In short, the real reason investors should be selling the shares is that they cost too much.
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The article eBay Shares Plunge Ahead of Thursday "Analyst Day" originally appeared on Fool.com.Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool recommends eBay, Visa, and VMware. The Motley Fool owns shares of eBay, MasterCard, and VMware. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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