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Outlook Holds Key to eBay Sentiment

Investors are confident that the fourth quarter was good, but there's some anxiety about 2002.
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Most analysts consider it a foregone conclusion that online auctioneer

eBay

(EBAY) - Get Report

had a stellar fourth quarter.

So when eBay reports year-end results after the close of trading Tuesday, investors will focus on the company's 2002 guidance, scouring the report for indications of eBay's ability to meet its ambitious growth targets.

"Everyone knows the quarter is good," says Steve Weinstein, an analyst who covers the company for Pacific Crest Securities. Weinstein says he hopes to see progress in the company's international business and in its efforts to sell big-ticket items such as automobiles.

Going Global

Auction listings internationally are growing at five times the rate of domestic auctions. Yet the overseas business' so-called monetization rate, or the cut that eBay gets from each completed auction, is only half that of U.S. sales, according to Weinstein's figures. (Weinstein has a strong buy on the stock, and his firm doesn't have a banking relationship with eBay.)

"Over the next few years I'd expect them to bring that up to the domestic level," Weinstein says.

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On average, analysts expect the company to report fourth-quarter earnings of 13 cents a share on revenue of $211.8 million, according to Thomson Financial/First Call. This compares with 9 cents a share on revenue of $134 million in the year-ago period.

Clearing the Fog

Most important, investors are expecting the company to provide financial guidance for 2002. Should eBay's projections fall short of what investors are expecting, the shares could stumble, say analysts. When the company reported its third-quarter earnings in October, shares fell after the company said it would merely meet fourth-quarter expectations.

Current projections have eBay earning 75 cents a share in 2002, according to Thomson Financial/First Call. But some analysts, still hyperbullish, are expecting 2002 earnings as high as $1, according to Safa Rashtchy, an analyst at U.S. Bancorp Piper Jaffray.

"While eBay remains an extremely strong and growing business, we are concerned that expectations for 2002 guidance may be higher than what the company will provide," Rashtchy wrote in recent research report. "Of course, eBay has always provided conservative guidance that it would then handily beat." Rashtchy has a market perform rating on the stock, even though he recently raised his earnings estimates for the fourth quarter. He says eBay's share price already reflects the strong quarter. (His firm doesn't have a banking relationship with eBay.)

eBay shares rallied throughout the holidays and are up about 53% since the market bottomed in late September in the wake of the terrorist attacks. In early December, several Wall Street analysts

ratcheted up their earnings estimates on the belief that the company's holiday marketing efforts, which for the first time included advertising circulars in major newspapers, were paying off.

In early trading Tuesday shares were up $1.16 to $64.32.

Opinions on Wall Street of eBay range from those who love the business model and love the stock to those who love the business model but think the stock is expensive. Indeed, at recent levels, eBay's shares trade at a pricey 84 times next fiscal year's earnings estimate. Evidently, investors have faith the company will reach its target of $3 billion in revenue by 2005, a goal that implies about 50% annual growth.

The earnings report is scheduled for release shortly after the close of trading. The company has planned a 5 p.m. EST conference call to discuss the results.