Should Investors Bid on eBay?

Investors await changes at the company's auction business -- and perhaps, its top office.
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Investors will focus on much more than whether


(EBAY) - Get Report

will hit its fourth-quarter numbers when it announces results after Wednesday's closing bell.

For starters,

The Wall Street Journal

reported Tuesday that CEO Meg Whitman would be retiring after spending a decade at the company, citing unidentified people familiar with the matter. An eBay spokesperson declined to comment on the matter, but the tenure of Whitman -- one of the most admired CEOs in Silicon Valley -- is certainly a top concern, particularly for investors who have been prodding for new blood in the top office.

Traders also will be listening closely for the changes in store as the company hopes to recharge its sagging auction business. eBay's other key business units, like the PayPal payment service and the Skype telephony service, are expected to deliver strong performances.

But it's the marketplaces unit -- which accounted for $1.32 billion of eBay's $1.89 billion in revenue last quarter -- that continues to overshadow strengths elsewhere and will be the center of attention.

Indeed, continued concerns about the auction unit have weighed the stock down since the company announced third-quarter results in October. Since then, shares of eBay have lost almost one-quarter of their value, while the broader


index, meanwhile, has slipped only about 15%.

Investors will scrutinize eBay's plans to boost growth in its auction business -- adjusting the fees that eBay charges to list items on its site is expected to play a major role in this.

For the fourth quarter, analysts surveyed by Thomson Financial expect the company to report earnings per share of 41 cents on revenue of $2.14 billion.

The quarter tends to be a strong one for eBay, and the company should post solid results, Jefferies analyst Youssef Sqali wrote in a research note on Friday. But guidance could be lower than analysts expect because of the lowered fees that eBay may charge for listings in order to spark growth.

"eBay should post good 4Q results next week, with both marketplaces and payments benefiting from Q4's, positive seasonality," Squali wrote. "The outlook for FY08 is likely to be conservative, with management perhaps guiding below consensus as the company attempts to revive listings growth in the US and Germany through a major price adjustment."

However, investors shouldn't ignore PayPal. The payment service continues to deliver impressive results in the face of


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heavily promoted rival Checkout service and may not be getting the credit it deserves within eBay.

Indeed, there has been increasing chatter that PayPal's full value hasn't been reflected in eBay's stock price and that the division may be better off if it were spun off as an independent unit.

PayPal net revenue totaled $470 million in the third quarter, growing 35% year over year -- and far outpacing the 26% growth rate delivered by the marketplaces business.

Then there's Skype. With only $98 million in revenue during the third quarter, the telephony service is still too small to move the needle on a company the size of eBay. But investors will want to see that user growth continues at an impressive pace for the service. Skype counted 246 million users at the end of the third quarter, up 81% year over year.

An unexpected shortfall in user growth would be a troubling sign to investors. At the beginning of October, eBay took a $1.43 billion writedown on the service it had shelled out $2.6 billion for in 2005.

The move was an admission that eBay didn't see the sort of moneymaking opportunities for the service -- Skype offers free computer-to-computer phone service, then hopes to upsell users to other offerings -- that it had hoped for when it made the purchase.

But fast user growth remains one of the saving graces of Skype -- and could mean the difference between additional revenue and another writedown in the future.