eBay Bid on Again

The company may have given pause to those betting against its ability to manage long-term growth.
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On Wall Street, you're only as good as your last earnings report. But when your last quarter is surprisingly good -- and when it reverses a couple of quarters of not-so-good earnings -- that's not such a bad thing.

Investors who were ready to dismiss

eBay

(EBAY) - Get Report

as a washed-up Internet star that was starting to go to seed were seriously reconsidering their outlook on the e-commerce giant.

eBay's stock was up 19% to $41.28 during Thursday trading after surprising the Street with a 22-cents-a-share earnings number that was 4 cents above analyst estimates. Volume was a lively 75 million shares halfway through the trading session.

Especially satisfying to eBay bulls was the fact that the strongest improvement came precisely in areas that had been problem spots for the past six months: Revenue from the U.S. and German marketplaces

accelerated nicely in the second quarter, showing that there may be life yet in its older and bigger markets. At the same time, newer markets, like the France, Italy and Australia, saw triple-digit growth.

Legg Mason analyst Scott Devitt said in a research report (surely the most gleeful note issued on eBay in the last six months) that his firm looks for industry titans that are facing periods of uncertainty. "eBay's business was being priced for annuitized mature growth, yet eBay continues to be a very high-growth business, in our view," wrote Devitt, who maintained his $50 price target on the stock.

"In our view, the 2Q05 results go a long way in pointing this out to the investment community," said Devitt, whose firm has no underwriting relationship with eBay.

Devitt earned his "I told you so" attitude: In a research note published Monday, when most were expecting a middling earnings report from eBay, he wrote, "The company is transitioning into a business that could be more powerful than what exists today ... the change agents within eBay are among the best in the industry."

It also seems that some of the revenue growth came from the controversial listings fee increases in January. At the time, eBay said the higher fees were aimed at creating a healthier marketplace for both buyers and sellers, cleaning up some of the less-desirable listings and opening up the potential for higher conversion rates and higher average selling prices.

Some sellers complained loudly, nicknaming the company "FeeBay" and accusing it of being motivated by crass greed. But this quarter, eBay showed higher conversion rates and average selling prices, and executives indicated that those increases were tied in part to the pricing changes.

"It is too early to assume that the broader, longer-term demand issues that eBay has been facing are all eliminated," said Safa Rashtchy of Piper Jaffray, which has no underwriting relationship with eBay. "eBay has won a battle and we need more time to judge if it will also win the war."

So, eBay could see some volatility and uncertainty through the summer as the typically quiet third quarter for e-commerce faces off against renewed expectations for eBay to again beat the Street's numbers. Still, the second-quarter report will serve as a reminder of the risks involved in betting against the ability of eBay to manage growth over the long term.