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Stock Analyst Update

Ebay Tops Expectations and Solidifies Its Position

Some long-term concerns, but this stock remains the best of its class.

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Even if eBay (EBAY) doesn't grow quite as quickly as the most optimistic projections, it's still one of the best Internet stocks to hold for the long term.

Shares of online auctioneer eBay rose slightly in Tuesday afterhours trading after the company reported second-quarter 2000 net earnings of $0.05 per share, excluding noncash charges. Analysts had projected $0.03 per share.

Indeed, eBay's performance was better than expected across virtually all metrics. Its revenue of $97.4 million was at the high end of expectations and 97% better than revenue from the same period in 1999. The number of registered users leaped a healthy 25% to 15.8 million, though some of those new users came from the addition of eBay Germany to reported numbers. By various other metrics, such as gross merchandise sales and auctions listed, eBay solidified its position as the number-one online auction site.

Ebay also showed improved profitability. Its gross margin rose sequentially from 73% to 76%, and its operating margin of 9% was much better than last quarter's 0.5%. The increase in the operating margin was particularly welcome; for most of 1999, the company showed an operating loss after being forced to reimburse customers for outages caused by server crashes.

Despite eBay's generally excellent quarter, a few potential trouble spots emerged. Average sales per auction dropped from $21.50 in the first quarter to roughly $20.80, continuing a downward trend from last year. The company says that's because it's expanding into new markets and people tend to initially auction smaller items before they become comfortable selling bigger-ticket items. That may be, but this number must start improving for eBay to continue growing as rapidly as it has.

Billpoint, the online payment system that eBay and Wells Fargo (WFC) introduced earlier this year, could also offer cause for concern. CEO Meg Whitman said Tuesday that Billpoint is facing stiff competition from competitors offering their services for free in order to grab customers and it is not growing as fast as she would like. That could be a problem, as many observers have factored in Billpoint as an important future revenue source for eBay.

Those caveats aside, eBay is in excellent shape. Not only is it financially healthy,but it keeps increasing its stranglehold on the Internet auction market.

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