(FORTUNE Magazine) – Last summer a reporter asked Internet guru Jim Clark for some pithy investment tips about a handful of Internet companies. His recommendations? Sell AOL, buy Microsoft and Amazon.com, and hold Yahoo. But when he got to eBay, he paused. "I don't know," he said.

Never mind that Clark's predictions, like those of most other investors in 2000, were completely wrong. His comments about eBay were telling. eBay's 22 million users are as devoted as a religious cult, but investors have never known what to make of the company. Sure, eBay has been profitable since the day it went public, but its long-term prospects have always seemed suspect. Remember the guy who tried to auction off one of his kidneys? On good days eBay seemed like a giant online swap meet, and on bad days a Third World bazaar--in other words, the easiest place to get ripped off in the world. To investors, neither seemed like the foundation for the next Microsoft.

Today Wall Street's mixed feelings about eBay are changing in a big, fat hurry. Why? Amid the Internet stock meltdown, eBay is making more money than ever. Profits for 2000 rose nearly 400%, to $48.3 million; revenues (i.e., transaction fees and advertising) nearly doubled, to $431.4 million; and registered users rose 125%, to 22.4 million. Gross sales, at $5.5 billion, are now comparable to those of Nordstrom. In 2000, eBay's stock got hammered like every other Net stock; but this year its shares are up 30%, while shares of Amazon, Yahoo, and AOL show few signs of life.

eBay's success tempts one to imagine an entire nation emptying its attic--and filling it up again with someone else's stuff. But what's really behind eBay's growth is that in the past year CEO Meg Whitman has slowly but successfully transformed the company into a full-fledged business exchange. Sure, millions of people still use eBay as a classified section on steroids. Indeed, in the past year eBay has strengthened that brand by starting to list real estate at $50 a pop and to run auctions for used cars for $25. An average of 700 homes and 5,500 cars a day are listed for sale, the company says.

But what Wall Street is really paying attention to is that Whitman is persuading big corporations like Sun Microsystems and Disney to use eBay as a sales channel. Sun, for example, sold $25 million of inventory and refurbished servers to new owners this past year. What's more, eBay has become a gold mine of new Sun customers. Some 25% of customers who bought Sun products on eBay in the past year had never done business with the company before, says Alex Rublowsky, who runs the auction experiment for Sun. The program has been so successful that Sun is now looking to extend it to more esoteric things, like auctioning off empty seats in the professional system maintenance classes it runs worldwide.

The question for investors, of course, is how big a payoff to expect from the initiatives. The stock, which now trades at a P/E of 110, is expensive after its recent run-up. That kind of ratio makes sense only if Whitman hits her audacious long-term goals. She intends to grow eBay's revenues 50% a year for the next five years. By 2006 she says she wants them to top $3 billion. Analysts say she'll have to attract a large stable of corporate customers, successfully expand the eBay concept internationally, and substantially increase eBay's listing fees. Right now eBay charges 5% on the first $25, 2.5% on the next $975, and 1.25% thereafter; the question is how high those percentages can go. Says Safa Rashtchy, an analyst at U.S. Bancorp Piper Jaffray: "There is a potential that sellers will reach a threshold of tolerance" and go back to old ways of selling.

But for investors with time to wait, eBay has great potential. Even if Whitman misses her targets by ten percentage points, says Rashtchy, the stock could still easily appreciate 25% a year for the next two years. In any market those are returns to keep investors happy; and for those keeping score, hardly anyone predicts that kind of payoff for Amazon.

--Fred Vogelstein