Diving Deeper Into eBay

Each quarter as

eBay

(EBAY) - Get Report

prepares to release quarterly earnings, investors start asking the same question: Will the company raise guidance?

With Thursday's first-quarter report approaching, most observers assume the answer is yes. The online auction giant, after all, has been nudging the financial bar higher ever since it set an ambitious 2005 revenue target more than a year ago. Still, in the wake of last quarter's

disappointment of sorts, in which the company said it would merely meet Wall Street's expectations, the question carries a bit more anxiety this time around than usual.

That's partly because fast growth becomes more difficult to maintain the larger a company gets. And it's partly because eBay increasingly has other things to worry about, such as nurturing new businesses to feed the growth machine and clarifying its relationship with payment-system providers. Thus, even as first-quarter earnings loom, investors' eyes gravitate toward the second quarter.

"People are looking for them to raise guidance," says Scott Devitt, who covers eBay for Legg Mason. "We're pretty comfortable that they're going to beat our numbers."

On average, Wall Street expects eBay to earn 16 cents a share in the first quarter, up from 11 cents in the year-ago period, according to Thomson Financial/First Call. Analysts expect eBay to report revenue of $244.5 million, up 58% from the $154 million in revenue generated during last year's first quarter.

Still, Devitt has a market perform rating on the stock, purely because of the pricey valuation. "We think it is the best e-commerce business out there, but where it's trading, it's hard to make a case to buy it," he says. His second-quarter earnings estimate matches the consensus of 16 cents per share; his firm doesn't have a banking relationship with eBay.

eBay shares lately traded at $55.59, putting them down about 15% on the year. Observers say that considering its steep forward price-to-earnings ratio of 74, the company will need to offer very bullish guidance for the shares to get a boost.

Anxiety

Worries about just what eBay's seeing for the second half of the year were kindled by an unusually tight-lipped performance last time around. When San Jose, Calif.-based eBay reported its fourth quarter, it gave guidance only for the first half of 2002. Those figures fell in line with Wall Street's expectations at the time, but investors had been hoping for better news and for a more complete 2002 forecast. Thus anything eBay says about the second half will probably grab the headlines.

Beyond any headline-grabbing guidance, investors and analysts will take a close look at the performance of two businesses with high growth prospects: the car business, called eBay motors, and the international segments, which should benefit from recent fee hikes.

These two businesses likely drove revenue growth in the first quarter, says Merrill Lynch's Justin Baldauf. He expects average listings to grow 13%, which includes 6% growth in U.S. listings and 28% growth in international listings, over the previous quarter.

Meanwhile, higher-priced goods, mainly autos but also electronics items such as computers, continue to grow as a percentage of total goods sold on eBay, he says. He expects these items to account for about 10.7% of total listings in the first quarter, up from 9.8% in the fourth quarter. (Baldauf has a long-term strong buy rating on the stock, and Merrill has had a banking relationship with eBay.)

Pay It Forward

Finally, analysts will be sure to grill executives in the conference call about the future of eBay's online payment system, formerly called Billpoint but changed to eBay Payments when eBay took control of the subsidiary from

Wells Fargo

earlier this year. The issue is how well eBay Payments can compete with

Pay Pal

(PYPL) - Get Report

, which went public this year and is the dominant online payment company on eBay and the rest of the Internet.

When eBay announced it was going to more closely integrate eBay Payments into its site, Pay Pal shares tanked, as the move was seen as a serious threat to Pay Pal. Now, after looking more closely at the numbers, most on Wall Street have changed their tune: they see Pay Pal as the threat to eBay, and a rumor even swirled this week that eBay could buy out the online payment giant. The numbers seem to bear this out: last year, payment volume grew about 18% for both eBay Payments and Pay Pal's auction business in the third quarter, while Pay Pal grew 24% in the fourth quarter with eBay Payments growth slowing to 16%.

Baldauf writes in a recent report that eBay is "likely to continue to face an uphill battle against Pay Pal."

Hopefully, investors will get a sense Thursday of how steep that hill is. eBay is scheduled to release its earnings after the close of trading, and a conference call is scheduled for 5 p.m. EST.