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eBay Aging Gracefully

It's running a more efficient and profitable business while gaining traction in newer areas of growth.


(EBAY) - Get eBay Inc. Report

has always had a tendency to surprise.

And yet on Thursday, the surprise was on eBay. Analysts who tend to be behind the curve with the company -- hence eBay's ability to constantly surprise them -- zeroed in on growth in its core marketplace business, which was 23% on year, or one percentage point down from the previous quarter.

eBay fell 4% on Thursday as analysts fretted over the

slowing growth in eBay auctions and stores.

In a way, eBay was giving up gains it had made in the past week, and yet the drop is kindly offering eBay bulls a second chance to get in on what remains, for an Internet company, a reasonably valued stock with good profit growth.

eBay is graying, but gracefully so. It may find itself a little more winded and with achier joints, but it's running a more efficient, more profitable business while gaining traction in newer areas of growth.

The bad news for eBay -- that revenue growth rates continue to slow -- isn't really as bad as it looks. eBay's net revenue grew 27% in the first quarter to $1.8 billion, which was down from a 35% growth rate a year ago. Excluding foreign currencies and acquisitions, or so-called organic growth, revenue rose 21%, down from 30% a year ago.

But when your quarterly revenue is approaching $2 billion, growth of 20-plus percent is respectable enough, provided you can keep your margins up. eBay ran into rocky waters here in the first quarter of 2006, when operating profit shrank to 23% of revenue, down from 33% a year earlier.

This quarter, however, eBay pushed its operating margin back up to 26%. The company sprays its earnings releases with a lot of metrics unique to itself -- conversion rates, take rates and so on -- but if you don't feel like learning eBay-speak and want a single, simple number, that's the one.

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Digging deeper into the numbers, you can see where eBay is gaining ground. Another metric that looks bad at first blush -- inventory listings are down about 5% from last quarter -- reflects eBay's success at weeding out some of the lower-cost and less desirable items for sale on its site.

Similarly, gross merchandise value -- the aggregate value of all stuff sold on eBay -- saw only 14% growth year over year in the first quarter. Yet eBay's marketplace revenue grew 23%, which is just below the 24% year-over-year growth in the fourth quarter of 2006 -- a busy one because of the holiday season.

What's all this mean? eBay sellers may not be listing new items as fast as they once were, but the items that are getting listed are selling for a higher price on average. The buyers who are poking around seller pages are more likely to take the plunge and make a bid.

Individual buyers and sellers will always have gripes about eBay, but a broadly painted picture of its marketplace shows that it's getting more mature and more liquid for now.

Meanwhile, its PayPal online payment service continues to grow. PayPal added 36% more accounts, to 143 million, although only 25% of them are counted as active (down from 28% a year ago). Those active accounts continue to make an average of five PayPal transactions a quarter, which is even with last year, so overall they aren't growing more active.

Still, while the number of total payments made through PayPal rose a mere 19% year over year to 177 million, total payment volume rose 30% to $11.4 billion. That has pushed the average PayPal transaction to $64 this quarter from $59 a year ago.

Finally, the company's Skype Internet telephony division saw some relatively impressive growth -- that is, not nearly as fast as many observers had hoped for when eBay paid $2.6 billion for it, but better than some of the recently lowered expectations.

Skype's revenue was $79 million in the quarter, less than a nickel of every dollar eBay made. Still, Skype posted its first quarter of profit on a non-GAAP basis, which should at least dispel concerns that the unit could turn into a drain on overall company profit as it grows.

Overall, eBay kept its flotilla of enterprises steaming ahead, while surprising analysts with strong profit. Not only did its 33 cents a share blow away the 30-cent consensus of 25 analysts surveyed by Thomson Financial, but it was two cents ahead of the most bullish estimate.

eBay also boosted guidance for the full year. It's now expecting revenue to grow between 21% and 25%, up from an 18%-to-22% range but still below last year's 26%. Its median EPS forecast calls for 26% growth to $1.32 a share, above the $1.29 a share analysts had forecast before the report.

At $1.32 a share, eBay's stock is valued at 25 times earnings as of Thursday's close. That valuation for a company with profit growing at 26% a year is a pretty good deal, whatever the analysts say.