eBay (EBAY) - Get Report has been upping the ante in Asia, but the company still has a glaring hole in its hand: Japan.

The online auction giant has been absent from the Japanese market since it discarded its site there early last year. To date, the move hasn't hurt the company much; its international growth has outpaced its domestic growth as it has steadily added to its portfolio.

Despite the company's expansion, the growth in eBay's international sales has slowed in recent quarters. And investors -- many of whom have paid a pricey multiple for eBay on the belief that it will continue to deliver heady growth -- may soon wonder when the company will re-enter the world's second largest e-commerce market.

"So far they've written off Japan. They haven't pushed it," said Heather Brilliant, who covers the company for Morningstar. "But as their international growth rate slows down, I think they might turn back to Japan."

(Morningstar does not do investment banking and Brilliant does not own eBay shares.)

eBay representatives did not return calls seeking comment. But company officials have said in the past that the company is keeping an eye on Japan and may one day re-enter the market.

eBay folded in Japan in March 2002. At the time, the company's Japanese site had just 25,000 listings and trailed far behind

Yahoo!'s

(YHOO)

auction site, which dominates the market there. eBay took a $1.2 million charge in the first quarter last year related to the closure of the site and laid off its entire staff there.

eBay hasn't let its costly Japanese venture scare it away from Asia and the Pacific. It's bought into Taiwanese and Chinese markets while upping its stakes in Australia and New Zealand.

Earlier this month, eBay announced a tender offer of about $382 million to purchase the remaining 50% it doesn't already own of South Korea's top online auction site, Internet Auction Company. The company expects the deal to close in mid-December.

In July, eBay completed a similar deal with EachNet, which operates its Chinese auction site, buying the 67% of EachNet it didn't already own for about $144.9 million. The company also has sites serving Hong Kong and Singapore.

eBay's international investments have begun to pay off. In the third quarter, eBay's international operations accounted for about 34% of its total revenue. That was up from about 26% of total revenue in the year-ago period.

And eBay's Asian operations are becoming a big part of that growth. At its current revenue rate, eBay's Korean site, which is its most developed market in Asia, will post about $50 million in sales this year, said Bill Cobb, the eBay senior vice president in charge of its international operations, at the company's annual analyst meeting in October. That means that about 8% of eBay's total international revenue this year will come from Korea. That's not bad, considering the company didn't enter the Korean market until February 2001.

But the company's run of success overseas appears to be slowing.

Excluding revenue from its PayPal operations, eBay's international sales grew by 105% in the third quarter over the same period a year ago. That's nothing to sneeze at, but it marked the third straight quarter in which the annual growth rate at eBay's international operations has declined. And the growth would have been substantially slower if not for the fact that the dollar declined against the euro over the last year, inflating the value of eBay's overseas revenue in dollar terms in its just completed quarter. As recently as the first quarter of last year, the company's international sales grew at a 191% annual rate.

eBay's international sales have slowed almost in tandem with its domestic revenue. In its most recent quarter, eBay's revenue from its U.S. operations, excluding PayPal, grew at a 29% annual clip. That was slightly slower than the 30% rate the company's U.S. operations grew at in the third quarter last year, but far off the 41% growth rate in the first quarter of last year.

Slowing sales aren't a surprise; few companies can grow sales at such heady rates for long periods of time. But the slowing of eBay's business stands in contrast to the apparent expectations of its investors.

Wall Street analysts have projected that the company's earnings will grow at a 40% annual rate over the next five years, according to Thomson First Call. Meanwhile, eBay is currently trading at nearly 57 times its own projected GAAP earnings next year.

That valuation would be even higher if eBay included the cost of stock options in its earnings projections. In the first nine months of this year, for instance, eBay's reported per-share earnings would have been about 45% lower if they included options costs.

eBay is trying to boost its long-term growth through expanding the range of products that are sold on its sites, attracting more buyers and sellers to those sites and pushing new forms of selling, including fixed-price sales. Company officials have also said that they are looking at India and other international markets where the company doesn't currently have a presence for future growth opportunities.

Costly Re-Entry

Which brings back the question of Japan.

Japan is the largest e-commerce market -- and largest economy overall -- in which eBay doesn't have a presence. According to IDC, e-commerce sites in Japan should ring up about $196 billion in sales this year, making it the second largest e-commerce market globally, trailing only that of the United States. Japan's e-commerce market this year will be about 60% larger than the combined markets of South Korea, Taiwan, Australia and China, according to IDC's data.

And it's a relatively fast-growing market as well. IDC expects e-commerce sales in Japan to grow at an average 19% annual clip between 2002 and 2006. That's comparable to the growth the research firm expects in Korea's e-commerce market during the same time period and ahead of the 16.9% growth IDC expects in Taiwan.

Although the research firm expects big things in China -- a projected average annual growth rate of 50.2% between 2002 and 2006 -- China's e-commerce market will be just 14% of Japan's this year, IDC said.

The problem for eBay is that getting a seat at the Japanese table may prove difficult. If anything, Yahoo!'s dominance of the market has increased since eBay left last year. In its most recent quarter, Yahoo! Japan reportedly saw an 81% increase in revenue growth from its auctions business, helping drive its overall profit and sales.

eBay's success has typically come from being the first major player in a market or by buying the market leader early in its development. The company has then typically built on its lead.

The market dynamics of online auctions are such that they tend to become near monopolies in their particular geographic markets fairly quickly, as both buyers and sellers seek the largest marketplace.

But re-entering the Japanese market as the leader would likely involve a costly deal with Yahoo! Japan, assuming the company would even want to sell. Barring that, eBay might have to pay a premium for one of the second-tier players or embark on a costly effort to restart its own site without much of a guarantee of success.

For now, the company may have better, less costly opportunities in other countries, particularly China, said Brilliant.

"It is sort of a Catch 22: Either they participate at a very high

cost, or they sit it out," said Brilliant. "In a way, I'm glad they're not plowing a lot of money into Japan."