eBay Prompts Selloff for Net Sector

Despite a better-than-expected earnings report, the stock dropped early but seems to be stabilizing.
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eBay's (EBAY) - Get Report stock price was falling faster than the Atlanta Braves' hopes for bringing home a national championship.

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Message Boards. eBay was single-handedly dragging down the Internet sector. It was recently down 12 1/2, or 8%, at 139 1/2 and contributed to the decline in

TheStreet.com Internet Sector

index, which was down 13.70, or 1.9%, at 709.45 in recent trading.

eBay's third-quarter earnings per share of 2 cents were a penny above market expectations, while revenue of $58.5 million was slightly above expectations. While the stock dropped sharply on the open today, it has shown some signs of stabilizing as some see the losses as a buying opportunity, particularly ahead of what is expected to be a stronger fourth quarter.

Deutsche Banc Alex. Brown

downgraded the stock to market perform from buy. Deutsche Banc analyst Shaun Andrikopoulos wrote that the risk/reward scenario "surrounding eBay stock has increased considerably, particularly given the uncertainty surrounding the company's operating model over the next several quarters."

Andrikopoulos noted that the above-consensus earnings number was due "largely to upside in interest income," and gross margins of 70.8% were disappointing. He added that leading Internet franchises can command valuation premiums vs. their competitors, but those valuations should only be "afforded to those companies with near-perfect business fundamentals AND flawless execution," which he apparently does not feel that eBay commands. Deutsche Banc has done underwriting for eBay.

But influential

Morgan Stanley Dean Witter

analyst Mary Meeker came to the defense of eBay and attempted to address why the stock moved down in after-hours trading Tuesday night. Meeker said a slowdown in revenue momentum was "simply the law of large numbers." A slowdown in registered user growth from 46% in the second quarter to 38% in the third quarter was due to seasonality, she said.

"Keep in mind that CQ4 should be seasonally strong, and we think that eBay's strategy of moving into new markets is a good one," she wrote. "We think this company is well positioned with a great asset base. It's not unusual for psychological dips to have an impact on this type of company. But we think eBay is a winner." Morgan Stanley Dean Witter, which has done underwriting for eBay, reiterated its outperform rating on the stock.

CNBC

was reporting that during Morgan Stanley's sales meeting today, Meeker said that eBay,

Yahoo!

(YHOO)

,

America Online

(AOL)

and

Amazon.com

(AMZN) - Get Report

were her favorite picks entering the holiday season.

But all were off early today. Yahoo! was down 4 1/4, or 2.4%, at 174 3/4 in recent trading, while AOL was down 1/4, or 0.2%, at 116 1/2. Amazon was down 2 7/8, or 3.5%, at 78 3/8 in advance of its scheduled earnings report after the close today. It is expected to report a loss of 28 cents a share.