Putting in a bid on eBay
Stock Spotlight: The online auction site has seen slow growth in its core business, but analysts still think it's worth the price.
By Keisha Lamothe, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- Online auctioneer eBay is starting to face some criticism from Wall Street as its growth rate cools off and competition from the likes of Google and Yahoo! increases.

Shares have plunged 31 percent this year, making eBay (Charts) the fourth-worst performer in the S&P 500. Yet, with this pullback in mind, many analysts think the company's stock is now worth bidding on.

Despite a dip in eBay's stock this year, many analysts think CEO Meg Whitman will get growth back on track.
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The company will report its third-quarter earnings Oct. 18, and analysts expect eBay's profits to increase 30 percent from a year ago.

Some investors, however, are concerned that sales growth in the company's core auction business, particularly in the U.S., is slowing.

Tim Boyd, an analyst with Caris & Co., thinks the market has overreacted to signs that the auction business is maturing.

After all, eBay, under CEO Meg Whitman, has maintained its market lead. Analysts also say eBay has the potential to increase growth in its communications and payments divisions.

During the past few years, eBay has expanded through the acquisitions of Internet telephone company Skype and online payment network PayPal as well as Shopping.com, Rent.com, and other e-commerce companies.

"We believe the eBay franchise is strong and intact," said James Friedland, an analyst with Cowen & Co.

But can eBay keep up with the rising amount of competition and win back the love of Wall Street?

Mounting competition

A growing number of competitors have popped up to challenge eBay. But analysts seem to agree that its biggest threat comes from search engine Google (Charts).

Google and eBay do have an international partnership but it increasingly looks like Google intends to be an eBay rival as well.

Google Base, a classified listings site, payment offering Google Checkout, and phone service Google Talk appear to be taking direct aim at eBay's core auction business, PayPal and Skype.

However, Phillip Remek, an analyst with Guzman & Co. thinks Google Base poses more of a threat to the free online classifieds site Craigslist than it does to eBay.

And Boyd thinks eBay won't see an impact from Google's new services until 2008 at the earliest.

What's more, analysts say that recent changes to eBay's fee structure, which were initially met with anger from some eBay customers, could wind up rejuvenating growth in the long run.

In August, eBay raised the fees it charges people to set up stores on the site. Many sellers were infuriated by the hike, and eBay saw a noticeable deterioration in store listings as sellers wound up fleeing to rival auction sites such as those set up on Amazon.com (Charts) and Yahoo! (Charts)

However, when the anger settled, many sellers returned to eBay and began listing items on the company's auction site, which is exactly what eBay hoped to achieve with the fee increase. For eBay, it is more profitable to have sellers list items on the traditional auction site as opposed to stores since more items that get listed on the auction sites are actually sold.

"They've had problems, they tackled the problems, and overcame them," Cowen's Friedland said.

Looking beyond auctions

Still, analysts think eBay will also need to show strong growth in newer businesses in order to justify the amount of money that eBay has invested in them.

Many investors were skeptical when the company decided a year ago to acquire Skype for $4.1 billion.

"There is a legitimate argument on whether eBay paid too much for Skype," Remek said.

But other analysts say it is too early to tell whether Skype and other services like PayPal will pay off in the long run.

"We haven't seen the full benefits from PayPal and Skype because it doesn't happen overnight," said David Eller, an analyst with Rochdale Securities.

For what it's worth though, both PayPal and Skype are growing more rapidly than the company's core business.

In the second quarter, payment revenue increased 39 percent from a year ago, compared to an increase of 20 percent in sales from its U.S. marketplace segment, which includes auctions and stores, and 23 percent from the international marketplace division.

Meanwhile, communications revenue in the second quarter was up 26 percent from the first quarter, by far the highest sequential growth rate for any of eBay's divisions.

One analyst said there's no reason why eBay's acquisitions shouldn't help it flourish in new categories.

"eBay can go into any market it wants and dominate," said Martin Pyykkonen, an analyst with Global Crown Capital.

eBay's stock worth a buy?

eBay is not the only Internet stock to take it on the chin this year. Shares of Amazon and Yahoo have also fallen more than 30 percent so far in 2006.

But its stock, trading at 29 times 2006 earnings estimates, is much cheaper than either Yahoo or Amazon, which have price-to-earnings ratios of 38 and 47 times this year's earnings estimates. Plus, eBay, more so than Yahoo! or Amazon, can still claim that it is an undisputed leader in its market.

Even though profit growth and sales growth may be slowing, it's not as if eBay is doing poorly. It is still expected to post numbers that most other large companies would kill for.

Analysts predict that profits will increase 16 percent this year on a 29 percent sales increase and that both sales and earnings will rise another 25 percent in 2007.

Caris' Boyd said investors are still wary of eBay because of some of the changes taking place at the company and that now is a good buying opportunity.

"I think investors are afraid of it because they don't understand it," Boyd said.

So while many investors linger on the challenges facing the company, it seems the worst is already priced into the stock.

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