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Stock Analyst Update

EBay Tops Expectations--What Else Is New?

Profit growth and new initiatives are right on track

As expected, eBay (EBAY) reported solid first-quarter results after the market close Tuesday, demonstrating why it continues to dominate the online auction world.

EBay's earnings came in at $0.05 a share, or $0.06 excluding certain noncash charges, two cents above consensus estimates. Revenue for the quarter was $85.8 million, a 100% increase from a year ago and also higher than estimates. The company increased its customer base to 12.6 million, up 26% from the fourth quarter and 230% from a year ago.

Just like last quarter, eBay was barely profitable on an operating basis, with a minuscule operating margin of 0.3%, but interest income from its large cash hoard resulted in a net margin of 7.3%. That figure would have been even higher, but the company implemented a couple of accounting changes that reduced its reported income by $2.3 million. The changes were designed to make eBay's accounting as conservative as possible, a refreshing attitude in an industry where accounting shenanigans are rampant.

In Tuesday's conference call, CEO Meg Whitman stressed eBay's commitment to providing a "complete end-to-end experience" for its users, making things easier for buyers and sellers every step of the way. One important initiative along these lines is the Billpoint payment system, which eBay unveiled this past quarter in partnership with Wells Fargo (WFC) and Visa. Whitman also noted that eBay's Web site has achieved the "utilitylike efficiency" that she promised last summer after a series of outages.

Whitman emphasized the growth potential of eBay's expansion into new geographical areas as well as new product categories. The company's German subsidiary now "dwarfs its nearest competitor," and its U.K. and Australia sites are doing well so far. EBay's auto division got a big boost during the quarter from its partnership with Autotrader.com, causing the division to grow twice as fast as the rest of the company. Whitman was also optimistic about the company's new business-to-business site, though she said it hasn't been up long enough to give specific numbers.

There were no major surprises in eBay's announcement, which is always a good thing for an Internet company. Its stock is still very expensive, but a premium is warranted for a company with such consistent profitability and flawless execution.

David Kathman does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.