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eBay: What's in Store?

Fans weigh the effect of a third-quarter fee boost.

Another three months, another tricky quarter for eBay (EBAY) - Get eBay Inc. Report.

The e-commerce giant is scheduled to report third-quarter earnings Wednesday afternoon, closing another chapter in which the company navigates the hazardous waters of temperamental sellers, fickle buyers and constant tinkering in its ever-expanding family of subsidiaries like PayPal and Skype.

eBay is expected to report 24 cents a share in earnings for the third quarter, according to a consensus of analyst estimates at Thomson/First Call. That's up from 20 cents a share in the year-ago period.

On a GAAP basis, analysts are expecting a profit of 16 cents a share.

Revenue is forecast to reach $1.43 billion in the quarter, up 29% from a year earlier. That would mark an improvement over the 20% growth rate in the previous quarter and down from the 32% growth rate in the same quarter a year ago.

Of all the Internet giants, eBay has been trading at the most attractive valuation. For the full year 2006, analysts are looking for EPS of $1.01 and for $1.25 in 2007. That gives eBay a P/E ratio of 28 for this calendar year and 23 for next year -- not bad for a company with revenue growing near 30% and earnings growing at a healthy clip.

But eBay seems to be dogged by a complex set of circumstances that result in management solving problems by creating new ones. For example, when its larger customers made noises about leaving the fold and going it alone, the company responded by setting up eBay Stores -- an online storefront on eBay's domain.

That was the right solution, but it created new problems. Sellers took to eBay Stores, which return lower margins to eBay itself, and activity at eBay's core Marketplace began to decline. Analysts wrung their hands and complained about weakness in the heart of eBay's main business.

So in August, eBay raised the fees charged for goods in its stores, hoping to push back more sale items onto the eBay Marketplace. It was there where buyers had more of a say in setting prices, which could create the kinds of bargains to revive activity in eBay's core business.

Wednesday's earnings report will offer the first glimpse into whether the higher store fees are reviving its Marketplace business, or are simply encouraging sellers to find another venue for peddling their goods.

Expectations that eBay's efforts will yield some modest gains have been rising, but some analysts are looking for more action, and more spending, to further revive buying on eBay.

"The structural problem at the company remains demand, as opposed to swapping out inventory (from Stores and core listings) and fixing supply," DeutscheBank analyst Jeetil Patel wrote in a report. eBay, he added, "must spend aggressively in advertising and marketing ... in order to build buyers on-site, which in turn drives growth." Deutsche Bank has no underwriting relationship with eBay.

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The other big move that eBay took during the quarter was its high-profile partnership with

Google

(GOOG) - Get Alphabet Inc. Class C Report

. The deal lets Google handle some advertising on eBay's international sites and will bring the companies together to work on click-to-call advertising, which some see as a promising area of Internet-ad growth.

And eBay signed a deal with

Yahoo!

(YHOO)

in May to put ads on some eBay searches in the U.S. and to run graphical ads throughout the site.

While many have praised these deals as a needed boost to eBay's revenue, others worry it may be another instance of a solution creating a new problem.

"These partnerships do little to address the key issues facing eBay (e.g., seller discontent, slackening demand, etc.)," wrote Derek Brown in a report at Cantor Fitzgerald. "At the same time, they raise a number of potentially thorny issues for us to consider.

"First, we are concerned that text-based ads from Yahoo!/Google on eBay's Marketplace will compete with listings posted by fee-paying eBay sellers for buyers' attention," wrote Brown. "Similarly, these new ad units may drive transactions, and the associated buyers, off eBay's Marketplace."

Brown has long taken a bearish view of eBay, and it's worth mentioning that the Yahoo! and Google text ads will appear only on searches that turn up no results on eBay itself.

But it could toss in one more ball for eBay's management to juggle as it struggles to keep both revenue and profit growing.