Can eBay's stock rebound?
Shares of the auction giant have struggled as fewer users visit its site. But are new changes sparking a revival?
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| The Bull: Sandeep Aggarwal |
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| The Bear: Jeetil Patel |
NEW YORK (Fortune) -- eBay's core business of online auctions is struggling. Traffic has dropped as consumers favor websites with set prices, such as Amazon.com and Walmart.com. The stock is off nearly 70% since 2004.
However, investors got some good news July 22 when eBay's earnings and revenue beat Wall Street's expectations.
Analysts said the surprise results were the result of changes eBay (EBAY, Fortune 500) made in 2008 when it altered its listing fees to encourage fixed-price sales, revamped its ratings system to reward top sellers, and improved its search engine.
It looks like eBay's turnaround plan is taking hold, but can the changes revive the auction giant for the long term? We asked two analysts for their take.
"As we expected, eBay beat second quarter estimates largely due to its marketplace business. Our own recent survey showed that eBay's turnaround initiatives are working. For example, the new fee structure encourages sellers to offer the more popular fixed-price items. In the quarter the fixed-price format accounted for nearly half of marketplace's sales.
"And eBay's new search function rewards sellers who offer free shipping, which buyers love -- we estimate that more than a third of items now include free shipping, up from low single digits last year. The way search results are now presented also makes it easier for buyers to find the right items.
"The second quarter was the second in a row that eBay beat Wall Street's expectations. This largely happened due to the growth acceleration in its marketplace for the first time after seven quarters of declines.
"Though management mentioned that the transformation of eBay Marketplaces is a long-term process and they are encouraged by the early signs of improvement, we think eBay has already addressed many of the most important aspects, such as encouraging free shipping, search favoring the best sellers, more buyer protection, and a series of fee changes.
"And eBay's PayPal business continues to outperform eBay's overall net revenue growth. eBay reminded that they can double PayPal's business in three years and that's largely due to PayPal's growth in merchant stores besides eBay. PayPal growth on and off eBay is pretty impressive.
"Overall, these changes will result in higher sales, better margins, and more satisfied buyers and sellers. Wall Street is under-appreciating the impact of these moves. We expect the stock to rise to $25 in the next year."
"We maintain our ``sell'' rating on shares of eBay. While investors may be excited with near-term stabilization, a drop in operating profits of 14% year over year and limited profit upside would suggest that eBay's business still remains challenged. The longer-term structural issues still persist at the company, as measured by gross sales declines and higher seller costs.
"The biggest issue eBay faces is that consumers have other e-commerce alternatives, including Amazon.com (AMZN, Fortune 500) and Bestbuy.com (BBY, Fortune 500) -- especially for mainstream retail goods, which now represent 50% to 60% of eBay's product mix.
"In our view the new initiatives haven't done much. On eBay, shoppers have to scroll through pages of inventory to find the right camera. Amazon may have two or three versions. eBay is forcing the buyer to do all the work. The lifeblood of eBay is demand, and underlying user traffic is declining.
"To compensate, eBay raised sellers' fees. That's driving sellers away. Sellers can earn higher profits at Amazon and other sites. We don't think most investors have recognized that, so eBay's stock price is still too high.
"We continue to think that eBay still has to invest aggressively in demand (via marketing), a concept that may be difficult to defend as off-line retailers spend online to take advantage of lower-priced online media buys.
"One of the big themes facing eBay is that ad rates have steadily moved higher for six or seven years. eBay's ability to buy advertising is diminishing fairly dramatically. In other words, if ad prices go up by 10%, and eBay is not going to adjust its ad budget to reflect a 10% price increase, you run into a challenge.
"We increased our price target for the stock by three dollars after the second-quarter earnings, but still expect shares to fall to $15." 
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