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eBay's Early Cheer

Vishesh Kumar

At Tuesday's close, the stock was up 24% in the last three months -- 9% of which was delivered in only the last month since the company announced earnings. Shares were up another 18 cents Wednesday to $33.83.

But the positive sentiment may just be kicking in. A barrage of analyst-issued research reports this week lauded eBay's current-quarter progress and gave a vote of confidence to management's efforts to get the business back on track.

Listings on its core auction site are growing at a healthy clip, and the amount of users eBay can coax into making purchases is also picking up as management predicted, said a Bear Stearns research report issued Monday. And Prudential Equity Group, impressed by eBay's worldwide growth, reiterated its overweight rating and $40 price target for the stock in a note also Monday.

And after a meeting with eBay CFO Bob Swan on Tuesday, Stifel Nicolaus analyst Scott Devitt emerged as the most vocal supporter of the stock. Following a long period of flirting with loads of unsuccessful ideas, Devitt wrote, the company had finally found its roots. He says the stock is poised for growth again after two years of getting beaten down.

After the meeting, "we came away with an increased conviction in the business, its management, and its common shares," wrote Devitt. "We believe eBay has appropriately gone back to its roots -- or just maybe, we are seeing the tail end of a late 2005, nonpublicized, Pez Dispenser Manifesto with eBay," he wrote, referencing the widely circulated memo earlier this week about how Yahoo!(YHOO Quote - Cramer on YHOO - Stock Picks) could turn its business around.

eBay's efforts to drive sellers from its stores business to its core auction market are panning out, Devitt wrote. And despite some dire predictions, Google's(GOOG Quote - Cramer on GOOG - Stock Picks) checkout service has yet to steamroll PayPal, eBay's online payment service.

"We expect PayPal to remain the dominant online payment platform on the Internet, despite competitive noise," Devitt wrote.

Along with a potential change of fortune in its business, eBay is also positioned to get a big boost from short-sellers covering their positions if the company continues to gain momentum into the holidays.

The stock is at "levels that may provide significant fuel for the stock if it should continue an upward trend," says Dylan Wetherill, president of researcher ShortSqueeze.com.

Still, despite the makings of a near-term rally, eBay continues to face some huge hurdles in the big picture. With the explosion of click-through adds from the likes of Google and Yahoo!, a growing number of sellers are choosing to avoid the eBay platform entirely, says Cantor Fitzgerald analyst Derek Brown.

This means even those analysts reporting listings that are in line with predictions are essentially confirming a decaying core business.

As its core business slows, eBay's attempts to take dramatic action to jump-start it have been widely off the mark, says Brown. Take the company's $2.6 billion acquisition of the Internet phone company Skype in September 2005, for example.

By integrating Skype's free phone service into its platform, eBay enables users to talk to each other more cheaply, which in turn would lead to more sales, the logic went.

But it wasn't the price of phone calls that kept users from talking to each other, Brown says, but rather the cost to sellers of having to answer phones that keeps Skype from making a meaningful impact to eBay's bottom line.

"Management is for the first time beginning to acknowledge that the core business has slowed and that they have made mistakes," said Brown. "But the steps they have taken are simply not enough to radically alter the trajectory of the business."

It's tough to predict how eBay will fare this holiday season. That will depend on the vagaries of many factors, such as the cost of oil and energy -- which determines how much consumers will have left over to spend -- and anticipating consumer confidence.

Short interest in the stock may make eBay even more explosive in the short run. When short-covering starts, the stock will go up -- essentially because it is going up.

But over the long haul, eBay will have to contend with an Internet that is simply much more open and functional than it was a decade ago. Meanwhile, competition is mounting in its core marketplaces business and PayPal and Skype services.

Amazon(AMZN Quote - Cramer on AMZN - Stock Picks) offers its own marketplace, Google continues to put its considerable muscle behind its checkout service, and Yahoo! Messenger offers a telephony service.

It may be happy holidays for now, but the heat will be on again come the new year.