Buyback Bucks Up eBay

Updated from 4:35 p.m.

eBay ( EBAY) rose 5% late Wednesday, despite offering disappointing guidance for the third straight quarter.

eBay said after the market closed that its third-quarter numbers wouldn't measure up, making it the latest Internet giant to raise slowdown worries. But investors applauded a big stock buyback and an increase in fees at the San Jose, Calif., online auction company.

For the second quarter, net income fell to $249.9 million, or 17 cents per share, from $291.6 million, or 21 cents, a year earlier. Sales jumped 30% to $1.41 billion. On an adjusted basis, excluding certain costs including stock-based compensation, the company's earnings were 24 cents a share, matching the Thomson Financial estimate.

"eBay had a good quarter," CEO Meg Whitman says in an interview with TheStreet.com. "We all felt like it could have been better."

The largest Internet auction site also threw investors a juicy bone, raising fees on its store listings and announcing a first-ever $2 billion stock buyback.

"$2 billion over two years is nearly not a whole lot,'' says Martin Pyykkonen of Crown Global Capital, who has a neutral rating on eBay. "Frankly, that seems weak.''

Nonetheless, Pyykkonen says the fact that eBay even posted an in-line quarter is seen positively given the low expectations investors had for the company.

And indeed, news of the buyback and fee boost overshadowed eBay's disclosure that it expects to earn 22 or 23 cents a share for the third quarter on sales of $1.36 billion to $1.43 billion. Analysts were expecting earnings of 24 cents a share on revenue of $1.43 billion, according to Thomson Financial.

The dance with disappointing guidance is nothing new for eBay, whose shares have been hit hard after the company twice rolled out in-line earnings and soft guidance. Tech fans are coming off Tuesday's disappointment from Yahoo! ( YHOO), which said the improvements to its search technology would start later than it had planned.

Still, Whitman remains upbeat about eBay's prospects. She argues that eBay's enterprise value isn't properly reflected in its stock price.

"There aren't just a ton of companies that grow 30% year over year," she says. "I think we have a lot of very interesting assets in this Internet space."

And some investors are looking at the recent decline in eBay -- the stock was down 40% for the year ahead of Wednesday's late rally -- as a buying opportunity.

"There has been this expectation that Google is going to take them apart and really destroy the business," says Rob Lutts, chief investment manager of Cabot Money Management, who follows the Internet sector, but doesn't own eBay among its $400 million in assets under management. "I think this company is a long-term solid franchise. I think the Street will give it more respect in the future."

"The stock on a price-to-earnings to growth rate looks like a good relative value to us," says Dale Malone, a senior portfolio manager with Old Second Wealth Management, which owns 39,000 shares of eBay among its $1 billion in assets under management. "The risk/reward looks pretty good at these levels."

Sales at the company's Payments business, which includes PayPal, rose 39% in the second quarter to $339.1 million. That's better than the 20% gain in the U.S. marketplaces and the 24% jump in the international marketplaces. eBay's Skype business, which eBay bought for $2.6 billion last year, had revenue of $41.2 million, up 26% from the prior quarter.

eBay remains one of the most popular sites on the Internet. As of June 30, eBay had 202.7 million confirmed registered users, up 29% from last year and 5% from the previous quarter. Gross merchandise volume, the value of goods sold on eBay, was $12.9 billion. That's an 18% jump from a year earlier and a 3% gain from the previous quarter.

One problem that eBay faces is that sellers have listed too many items in its store formats, creating confusion for buyers, Whitman says. That's why eBay is raising fees for store listings, of which eBay had more than 100 million in the quarter, she says. The company says a "typical" person who uses the stores format will see their fees rise by less than 6%.

eBay sellers can be a cantankerous lot. Many complained on the company's message boards about the company's decision to ban the use of Google Checkout for security reasons.

In the interview, Whitman denies that the decision was made because of any sort of animosity between eBay and Google.

"When you handle people's money, you have to be right 100% of the time," Whitman says. "There is some chance," she adds, that eBay will eventually allow its clients to use Google Checkout.

Shares rose $1.42 late Wednesday to $27.35.

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