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Stock Analyst Update

EBay Shows Why It's the Cream of the Internet Crop

It's one of the few stocks in the industry worth owning long-term.

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What Happened?
Online auctioneer eBay (EBAY) on Thursday reported third-quarter earnings of $0.07 per share (excluding noncash charges), $0.03 better than Wall Street estimates and five times its year-ago figure. Operating income grew 64% compared with last quarter, and the company projected that it will more than double its operating margins by next year. EBay showed no signs of slowing growth, as revenue was 94% higher than a year ago and its customer base increased 18% from last quarter to nearly 19 million.

What It Means for Investors
EBay is certainly not cheap at 300 times Zacks forward earnings, but we think it's one of the few Internet stocks that long-term investors can seriously consider owning. The September quarter's results confirm eBay's status as one of the few Internet stocks whose financial strength already rivals that of the best offline firms. The company's business model has made it profitable since day one, and its copious positive cash flow means it can keep expanding and trying new initiatives without having to worry about getting more funding. Moreover, because virtually none of eBay's revenue comes from advertising, it's not affected by the concerns about slowing online ad spending that have hurt other blue-chip Internet stocks such as Yahoo (YHOO) and America Online (AOL).

Rather than resting on its laurels, eBay has worked on various fronts to maintain its growth and profitability. Its auto and real estate sites are doing well, and its recent acquisition of Half.com gives it a potentially lucrative fixed-price site. Its German and British sites have come to dominate their markets, and its new site in France joins one in Japan. EBay has increased its revenue per transaction by adding services for users, and its Billpoint online-payment system finally seems to be gaining traction after rival Paypal started charging some of its users.

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