(FORTUNE Magazine) – The dangerous thing about auctions is that bidders can end up paying more than they ever meant to, because they don't want to risk missing a great opportunity. Kind of like the way investors are treating eBay, a cyber-classified-ads-cum-auction Website. The company, which links buyers and sellers of items like antique telegraph keys and old Mad magazines, had $12.9 million in revenues and $663,000 in profits last quarter.

Investors were salivating over its IPO in late September because this Net business actually had profits (however tiny). And in a scant seven weeks the stock soared 677%, to a recent high of $140. That works out to an outrageous 780 times 1998 earnings estimates. eBay--which generates 8% of its revenues from Beanie Babies trading--suddenly had a market value of $5.5 billion. (Consider this: Greyhound Lines, the venerable 85-year-old bus company, recently sold for $470 million, meaning that according to the market, eBay is worth 12 Greyhounds!) Even Goldman Sachs analyst Michael Parekh, who helped take eBay public, can't really rationalize its sky-high valuation. "If you look at the [valuations of the] leadership companies--whether eBay in commerce or Yahoo in online services or Amazon in books--they're going to be more difficult to justify on traditional measures."

The stock performance may be all out of proportion, but the fact is, eBay has stumbled onto the next great E-commerce category: collectibles. It was founded in 1995 by Pierre Omidyar, a 31-year-old software developer who wanted to help his fiancee trade Pez dispensers online. He created a small auction site, charging just a tiny fee and commission for each listing. The risks were minimal since eBay acts only as an intermediary; the parties arrange delivery on their own. The model far exceeded Omidyar's expectations, and within a year he quit his day job. This year he hired as CEO Meg Whitman, who previously oversaw brands like Mr. Potato head and Teletubbies for Hasbro.

eBay's success is testimony to the Internet's ability to transform one person's junk--taxidermy animals or Fisher-Price toys--into another's treasure by matching sellers with a huge audience of buyers. Domenica Brockman, a Brooklyn antiques dealer, got hooked after she was able to sell an obscure Depression-era green-glass pitcher--that she paid $3 for--to a collector for $150. "I never would have gotten that price for it in my store," she says.

This enthusiasm has made eBay the leader in the online collectibles market. It was the fifth-most-visited Website in August, according to Media Metrix, an Internet-tracking company. "More time is spent in eBay's community than on either AOL.com's or Walt Disney's Website," says Mary Meeker, an analyst at Morgan Stanley Dean Witter. This growth has been driven by word of mouth, since until recently the company has avoided advertising. "Every auction and every buyer begets another auction and another buyer," says analyst Mitch Bartlett of Dain Rauscher Wessels.

But competition is heating up in the wake of eBay's success. A number of competitors want a chunk of the $180 billion that Americans spend each year on collectibles at auctions. Yahoo recently teamed up with OnSale, which auctions consumer electronics, to launch a site similar to eBay's but free for users. (OnSale's own person-to-person spinoff fizzled, and its stock hasn't enjoyed the same boost as eBay's, slipping 43% since March.) Other competitors include the portal outfits Excite and Lycos as well as startups Auction Universe, Haggle Online, and Auction Interactive 2000. But eBay has the advantages of being the first in the business and the biggest. Size is important in this E-commerce category, since more bidders yield better prices for sellers.

In any case, the E-auctions market could grow to support more than one site. Meanwhile, eBay's electronic garage sale is chock full of stuff that could help propel its stock price. Some items testing the limits: a 1998 Volkswagen Beetle (minimum bid: $17,895) and a Russian space shuttle ($99,000).

--Jeanne Lee