eBay Faces a High Bar

Investors enjoying a nice run-up look for the next catalyst.
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eBay (EBAY) - Get Report heads into its first-quarter earnings announcement Wednesday on solid footing.

Shares are up about 16% since the beginning of the year, handily beating the 4% gains that the broader

Nasdaq

index has made over the same time.

Investors have regained confidence in the online auction giant after it calmed fears that the growth of its core operations may be in terminal decline. During its fourth-quarter earnings announcement in January,

eBay said growth in its Marketplace business had picked up sequentially, albeit modestly. Shares have rallied about 23% since then.

But while eBay's stock still presents a relative value -- it trades at 23 times forward earnings and commands the lowest multiple among Internet giants -- the bar is a bit higher this time around. Along with continued signs of improvement in the auction business, investors will be looking for solid plans to extend the company's popular PayPal payment and Skype telephony services.

For the first quarter, analysts surveyed by Thomson/First Call are expecting earnings of 24 cents on revenue of $1.72 billion. For the fiscal year, analysts expect $1.03 in earnings on revenue of $7.28 billion.

Merrill Lynch analyst Justin Post forecasts first-quarter revenue will come in slightly above consensus estimates at $1.73 billion, according to a research note on Monday. Post expects the average selling price of items to be on the rise, along with a higher conversion rate of browsers to shoppers.

For Jim Cramer's take on the company discussed in this article, please click here

for his Wall St. Confidential video.

And while he expects that "management will have a positive tone on marketplace improvements," he cautions that slowing listings growth in March, coupled with the seasonally slow summer quarter approaching, means that a more bullish outlook for the second quarter is not in the works.

Still, Post expects eBay's stock to benefit from a growing amount of merchandise sold over its platform in 2007. Merrill Lynch makes a market in eBay shares.

Beyond eBay's auction business, though, investors will be looking for progress in its two other main lines of business: PayPal and Skype. Both services made some bold moves over the quarter, but it's too soon to tell whether they will pay off.

In March, PayPal announced that it planned to

launch a service that lets users make payments via mobile phones or devices within a year. The move would allow eBay to use its popular payment service to beef up its offering in the rapidly growing mobile device market.

Still, while breaking new ground, PayPal continues to face competition from

Google's

(GOOG) - Get Report

rival Checkout service. Launched in 2006, Checkout has been aggressively pushed by the search giant. And while PayPal -- which continues to account for a growing amount of eBay's revenue -- has held its ground remarkably well so far, investors will be playing close attention for signs of a fracture.

The company's Skype division

saw the launch of two new services in March. SkypeFind will let users rate and review local businesses, such as restaurants. Skype Prime allows users to provide expert services over Skype -- ranging from math tutoring or astrological advice -- with payments made over PayPal.

Investors have grown accustomed to the impressive number of new users Skype brings into its fold every quarter. Still, eBay is far from justifying the $2.6 billion it paid for the company, and the new services hope to open up avenues for revenue creation beyond Internet telephony services.

But there are reasons to be cautious about both services: SkypeFind will face an uphill battle in a crowded market, while many aspects of Skype Prime remain to be ironed out.

Finally, investors will be looking for proof that eBay as a whole can function better than the sum of its parts.

That's a tall order for the company, but then again, so was turning the tide in its core auction business. And investors that bet the company could six months ago were well rewarded.