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eBay Slide Brings Bargain

A 6% selloff ignores the online auctioneer's positive results.

It might be time to buy


(EBAY) - Get Report


Shares of the auction giant were off more than 6% on Thursday following the company's

third-quarter earnings announcement late Wednesday. eBay topped Wall Street's top- and bottom-line expectations while also raising forecasts for the fourth quarter and the entire year.

The news brought an initially bullish response that sent shares 5% higher in after-hours trading on Wednesday, but the sentiment swung dramatically on Thursday after a downgrade and a bearish note by one analyst.

But the criticism tends to dismiss the considerable strengths of eBay's business while focusing unduly on the downside. Thursday's selloff may have brought investors a good opportunity to enter the stock.

Deutsche Bank analyst Jeetil Patel wrote in a Thursday note to clients that eBay's third quarter, while seemingly impressive, received an unusual boost from favorable foreign-exchange and tax considerations. Meanwhile, the growth of the number of transactions conducted on eBay has flattened, Patel wrote, meaning the company may have to spend aggressively on advertising to attract more users. That, in tern, could cut into margins further along with triggering other problems.

"We think eBay is facing a worst case scenario in its business due to 2% transaction volume growth (& potentially declining soon) user disengagement, higher ad costs, declining purchase frequency, rising seller costs and operating margin pressures," Patel wrote.

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And he sees a promotion that the company is offering sellers before the start of the holiday season as confirmation that the doomsday scenario may be playing out.

"Despite the commentary of a relatively healthy core eBay business, we find it difficult to reconcile a 3-week long listing fee discount of 33% (through November 5th), which truly calls into question the health, growth and positioning of the core business (if business is that good, why reduce fees?)," he wrote.

But Patel's fixation on transaction volume growth is a thin basis on which to construct a nightmare scenario.

What's more, it misses the many other positive signs to emerge from eBay's quarter. While the number of transactions grew only 2%, revenue from eBay's auction business grew 26%. Gross merchandise volume, meanwhile, grew 14%. And both of those metrics are at least as important for eBay's bottom line as the number of transactions.

Patel also reads too much into a promotional move for sellers as a confirmation that business is really slipping.

Cutting prices for sellers before eBay's most important quarter could in fact be a shrewd way to offer more items before the holidays.

Indeed, while Deutsche Bank's call seemed to rule sentiment on Thursday, many more analysts seemed more impressed than perturbed. Goldman Sachs, Bear Stearns and Stifel Nicolaus all indicated that there were many positive developments in Wednesday's earnings announcement.

"Positive, broad-based momentum continues with stable-to-accelerating year over year growth in revenue ex- foreign exchange, gross merchandise volume, and operating income," Goldman Sachs analyst Anthony Noto wrote in a research note raising his earnings estimates for the company for the next three years and raising his price target to $51.

The stock was recently trading down $2.55 to $38.05.

"We expect the stock to benefit post any potential knee-jerk skepticism on fee changes or started 2008 swing factors given that ultimately Street estimates are going higher and that there is potential for multiple expansion due to the GMV acceleration in 3Q and the potential for GMV and listings to accelerate in 4Q2007."

With so many positive developments, this short-term selloff could present an attractive chance to buy.