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Ogling the eBay Expansion Engine

Second-quarter earnings will show whether the online auctioneer is growing fast enough to satisfy investors.
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If anything can trip up eBay (EBAY) - Get eBay Inc. Report, it might be a worldwide economic slowdown.

The online auctioneer, scheduled to report second-quarter earnings after the close of trading Thursday, has maintained its cachet with tech-addled investors by consistently churning out sales and profit growth. The second quarter should prove no exception: Analysts have raised earnings estimates and price targets in recent days, boosting an already pricey stock.

So expect investors to scour Thursday's report for signs of growing pains. International progress will merit special attention, seeing as eBay has staked its reputation on a plan to boost revenue to $3 billion by 2005, partly by expanding into 25 overseas markets. But overseas economies, notably Europe's, have run into trouble in recent months, which could hurt eBay's numbers. With the stock trading at a huge premium to its Internet commerce peers, any signs of an overseas slowdown could spark a selloff.

Pillar of the Community

eBay's good name with investors comes as no surprise, considering the company's track record. Its operations are profitable and fast-growing, and its financials are complete and easy to understand. Beyond that, its business model is exemplary, analysts say: eBay carries no inventory and has no analog in the physical world. That sets it apart from one-time Internet highfliers such as retailer

Amazon.com

(AMZN) - Get Amazon.com, Inc. Report

.

"eBay's extremely solid financials are testimony to both the company's excellent business model, which requires very little investment and which has a very strong network effect, and to the company's strong financial management," says Faye Landes, an analyst at Sanford Bernstein.

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eBay still on the rise

That said, Landes is a bear on the stock. She rates eBay as market perform, analyst-speak for steer clear of the shares, because it trades at a pricey 105 times Landes' 2002 earnings estimate. (Sanford Bernstein doesn't have an investment banking business.)

According to market research firm First Call/Thomson Financial, Wall Street analysts expect the company to earn 9 cents a share, up from 5 cents a share in last year's second quarter. Revenue is expected to jump 69% to $165 million.

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Driving the strong quarter were higher average selling prices, a full quarter of higher listing fees (those were introduced in January) and shorter auction times, according to Mark Rowen, an analyst at Prudential Securities who has a buy rating on the stock. He

raised his estimates midquarter. (Rowen's firm has had a banking relationship with eBay.)

What to Watch

Analysts aren't concerned that eBay will miss second-quarter targets, so investors' eyes will be elsewhere. First, anything the company says on the progress of its international businesses is important. The company operates in 18 foreign countries; in the past year it acquired Korea's

Internet Auction Co.

and France's

iBazar

. While its international operations haven't yet contributed to profits, the expansion is widely considered a shrewd move by eBay. Any information on the number of listings and how much revenue was generated from abroad will be closely watched.

Last year, the company, based in San Jose, Calif., also acquired

Half.com

, a fixed-price site where users can list items for sale, rather than for auction. The site has proved wildly popular, and the company has expanded it to several categories, including consumer electronics, computer equipment, sporting goods and trading cards. The company has been stingy, however, on doling out information on the site's finances, and analysts hope to see more details Thursday.

And finally, here's one thing not to expect: upward guidance for the remainder of the year. While the company may slightly top second-quarter estimates, most analysts say there's little chance management will boost estimates for the third and fourth quarters.