Internet

Return to Article

eBay Wants to Make Waves

Jonathan Berr

Investors will get a chance this week to reassess their tepid take on eBay (EBAY).

Shares of the largest Internet auction site have dropped 40% this year as an onslaught from Google (GOOG) threatens to further tamp down eBay's already-slowing growth. eBay's plunge comes as the Nasdaq has posted an 8% decline and another 2006 underperformer, Net rival Yahoo!(YHOO), has dropped a less breathtaking 18%.

Investors will get a chance Wednesday afternoon to judge for themselves whether reports of eBay's demise have been exaggerated. The San Jose, Calif., company is expected to make 24 cents a share, according to Thomson Financial, up from 22 cents a year earlier. Sales are expected to rise 30% to $1.41 billion.

To be sure, eBay still has plenty of friends among Wall Street analysts. Six have upgraded the company since January, and their mean target price for the shares is $39.36, more than $14 above their recent price.

"The key to unlocking this value will be investors' belief that eBay can grow 20% to 25% vs. the low-teens growth that is implied in its current valuation," writes Goldman Sachs analyst Anthony Noto, who rates the shares outperform, in a recent note to clients.

Earlier this month, Google launched Google Checkout, an online payment processing feature that competes against eBay's PayPal unit. Wall Street was further unnerved when Jeff Jordan, the well-liked head of PayPal, recently said he planned to leave the company.

eBay is no longer expanding at the levels that it did even a year ago. Search advertising has made it easier for small businesses to bypass eBay and promote themselves directly to the public. Even bulls have taken note.

Gross merchandise volume, the metric showing the value of goods sold on eBay, will jump 14% from a year earlier to $12.4 billion, says Noto, who has a $54 target on the stock. He is estimating that listings grew 33.4% to 587 million and that active users rose 29% to 83.3 million.

While those figures seem impressive, they actually highlight how eBay's business growth is slowing. For example, gross-merchandise volume rose 32% during last year's second quarter, but that slowed to an 18% boost in the first quarter of this year. Figures for listings and active users also show a slowdown.

eBay is at a crossroads. For most of its history, it was able to rely on growth from the ever-increasing number of new Internet users. But competition for each online shopping dollar continues to intensify. In addition, smaller specialized sites in areas including ticket sales continue to nibble at the company's businesses.

eBay is responding to the changing environment. Last year, the company acquired Internet telephone service Skype for $2.6 billion. Investors are still questioning whether eBay overpaid for the unprofitable company, which eBay says now is an integral part of its strategy.

In May, eBay and Yahoo! said they'd formed an alliance to promote each other's services. Critical for eBay is Yahoo!'s promise to promote PayPal, which accounts for about 25% of its revenue.

eBay unveiled eBay Express, a site that only sells fixed-priced goods, a month earlier. So far, the site hasn't been a huge success, says Jordan Rohan, an analyst with RBC Capital Markets, who has an underperform rating.

"According to some checks, eBay Express is responsible for fewer sales than eBay Poland," he says in an interview. "Go try and find something on eBay. It's difficult."