eBay a Haven in Hard Times

Still, eBay faces its share of challenges. The biggest will be to continue to maintain the impressive growth in its PayPal business unit despite mounting competition. Revenue for PayPal grew 37% in the fourth quarter of 2006 from a year earlier -- a rate more than 50% faster than that of eBay's auction business -- and came in at a hefty $417 million. While Skype, eBay's high-profile Internet telephony unit, grew at a blistering 164%, it contributed only $66 million during that time.

While PayPal continues to lead the online payment market, it has plenty of room to grow, PayPal President Rajiv Dutta said in an interview. An impressive two out of five U.S. Internet users already have a PayPal account, but the service accounts for less than 10% of total e-commerce volume. And despite growing at a healthy clip, e-commerce accounts only for less than 4% of the volume in retail.

But PayPal will face intense competition as it sets out to extend its lead during 2007. In January, at the World Economic Forum in Davos, Microsoft (MSFT Quote - Cramer on MSFT - Stock Picks) Chairman Bill Gates announced that the software giant is considering entering the online payment market.

However, the most immediate pressure will come from Google(GOOG Quote - Cramer on GOOG - Stock Picks), which has been aggressively pushing its Checkout payment service with promotions and prime advertising territory on its home page and in its search results.