Don't Write Off eBay

This could have been a disastrous quarter for eBay (Nasdaq: EBAY  ) . There were already well-researched whispers of a dip in auction listings. Google (Nasdaq: GOOG  ) was aggressive in promoting its Google Checkout platform -- a potential PayPal killer -- through fee-processing markdowns. Skype, profitable for the first time ever during the first quarter, could have dipped into the red.

I think it's OK to come out of the storm cellar now, marvel at the mostly blue skies, and put away the "sell it now" button.

eBay delivered better-than-expected second-quarter results last night. Revenues climbed 30% to hit $1.83 billion. Adjusted earnings soared 34%, landing on the $0.34 per-share mark. The top- and bottom-line showings clocked in slightly ahead of where Wall Street was perched.

eBay is a three-headed beast, so let's take a look at how each division helped drive overall market-thumping results.

Marketplace thrives despite eBay's cobwebs
Doomsayers can point to the 6% dip in year-over-year global auction listings. It's not pretty. However, gross merchandise value still climbed by 12% during the period. There may have been fewer items up for sale, but they sold at higher prices with higher conversion rates.

Overall, marketplace revenue climbed 26%. It's not all eBay here, though. A lot of the growth came from eBay sites that don't march to the listing and gross merchandise value metrics. Shopping.com, Rent.com, and the recently acquired StubHub grew faster than the namesake auction site.

The company also scored well with free classified sites, international partnerships, and advertising. Yes, advertising. The company has deals in place with Yahoo! (Nasdaq: YHOO  ) and Google to serve up targeted ads. It's an obvious way to monetize the company's free Kijiji classified listings site. It's also a way to enhance eBay.com's own performance, as long as the ads don't distract from -- and devalue -- paid seller listings.

PayPal pays off, again
There weren't too many dings in PayPal's armor. Google Checkout is no PayPal killer. It's not even a worthy PayPal stalker. That may change, though, especially if merchants promote Google Checkout aggressively over the holidays, but it's hard to fault eBay's financial payment platform for its second-quarter performance.

Revenues rose by 34% at PayPal. With $11.69 billion in money exchanging hands through the platform, total payment volume rose by 32%. And even if Google is gunning for merchants first, PayPal's merchant services business is growing faster than the non-merchant transactional core.

Skype speaks up
Communications remains the smallest, yet fastest-growing slice in the eBay pie. Revenues soared 103% during the quarter, fueled by a 94% uptick in registered users. The voice chat service now has more than 220 million registered users. Skype also posted its second consecutive profit.

Skype still isn't as hot stateside as it is overseas. Even under eBay's ownership, most of the new users are still coming from Europe and Asia. While Skype continues to offer up North American promotions -- like offering users free global SkypeOut calls during Mother's Day in Canada and the United States -- it still hasn't proven to be the seamlessly integrated application into eBay's auction marketplace and PayPal platform.

A case for eBay as a value stock
Not all of eBay's 30% top-line growth has been organic. Back out the recent wave of acquisitions to weigh the company on a more comparable basis, and revenues inched just 23% higher. We can quibble about the dip in listings. The United States and Germany have gone from being bread-and-bratwurst markets to priorities that CEO Meg Whitman hopes to reaccelerate in the coming quarters.

Auction listings feel tired, and perhaps that's why active users have climbed by just 7% over the past year. But eBay isn't going to give up here. It will launch a redesigned home page later this year. Also in the works are visual features and service enhancements that will make the countdown process more exciting. Hitching its wagon to the Web 2.0 revolution, the site's eBay To Go feature -- now in beta -- allows blog writers and webmasters to broadcast select listings on their own sites. Cashing in on the same embedded feature that has powered the revolutions at YouTube and News Corp.'s (NYSE: NWS  ) Photobucket, folks can single out their own listings, great deals, or outlandish items on the block. The limited lifespan of eBay listings may eat into the attractiveness of eBay To Go, but the blogosphere's citizenry likes to tug on current feeds.     

So we can't bury eBay's auction business just yet, but there are enough bullets in the eBay verb-loaded revolver. In short, eBay can be a compelling value even if this is as good as eBay gets on the auction front.

The company is guiding investors to expect adjusted earnings to come in between $1.34 per share to $1.38 per share. That prices the stock at just 25 times this year's bottom-line guidance. That's a reasonable price, and I'm telling you that as the eBay bear in last week's installment of Dueling Fools.

It's almost a win-win at this point. If eBay isn't able to get a handle on its auction business, it will mean that faster-growing subsidiaries like PayPal, Skype, and its non-eBay marketplace subsidiaries are shouldering a bigger load, justifying a richer multiple. If the reacceleration efforts pan out, eBay will be back to running on all cylinders, earning its market premium that way.

So, I'm no longer fearing a disaster here. The market clipped the shares last night, no doubt concerned over the company's sluggish business, but that just makes the value argument that much louder.

Now, if only that resilient conversion rate the company is achieving on its trimmed back listings can rub off on eBay's bears...

eBay and Yahoo! are Motley Fool Stock Advisor newsletter selections. Read all of the original recommendation reports with a free 30-day trial -- no bids required.

Longtime Fool contributor Rick Munarriz is a satisfied eBay user, with 172 positive feedbacks to show for it. He does not own shares in any of the companies in this story. He is also a member of the Rule Breakers analytical team, seeking out the next great growth stock early in its defiance. The Fool has a disclosure policy.


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