Foolish Forecast: eBay's Enticing Value Proposition

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Get your bid in now, because eBay (Nasdaq: EBAY) reports fourth-quarter 2007 earnings after Wednesday's closing bell. Check out Seth Jayson's scathing review of the third quarter, right alongside Rick Munarriz's kinder, gentler dissertation. Then come back here for some fresh info.

What Fools say:
Here's how eBay's CAPS scoring rates against some of its peers and competitors:

	Market Cap (millions)	Trailing P/E Ratio	CAPS Rating
eBay	$38,345	234.1	***
Amazon.com (Nasdaq: AMZN)	$33,115	92.1	**
Yahoo! (Nasdaq: YHOO)	$27,771	40.4	***
Mercadolibre (Nasdaq: MELI)	$2,081	255.8	***
Gmarket (Nasdaq: GMKT)	$1,047	37.1	****

Data taken from Motley Fool CAPS on 01/21/2008.

Some CAPS players think that eBay will benefit from a U.S. recession, because online auctions tend to end in reasonably cheap prices. On the other hand, others feel that a slowdown will hurt this company, because the goods on offer tend to be discretionary and nonessential. Either way, the bulls fuel their fire with some historically depressed valuation metrics ... um, except for the GAAP price-to-earnings figure listed above for eBay, of course. Excluding the $900 million total one-time Skype writedown, the non-GAAP trailing ratio would be about 36 today.

What management says:
Despite being "disappointed" about reducing the goodwill value of its Skype subsidiary something fierce, CEO Meg Whitman called the third quarter "a great start to the second half of the year." The overall business mix exceeded expectations, and even Skype is doing its part -- just not quite as quickly as originally projected. And eBay will now "move faster and more aggressively on product enhancements, pricing changes, customer support and trust and safety investments, as well as customer loyalty programs. All of these changes are designed to improve the end-to-end user experience for both buyers and sellers, and can therefore change the trajectory of gross merchandise volume growth."

What management does:
Earnings took a hit last quarter because of the Skype charge. That misstep aside, it's a bag of mixed blessings: Sales growth is slowing down, and gross margins are on the lam, but cash flow and operating margins look stable and juicy.

Margins	9/30/2006	12/31/2006	3/31/2007	6/30/2007	9/30/2007
Gross	79.6%	78.9%	78.5%	78.0%	77.6%
Operating	24.3%	24.0%	24.9%	25.3%	25.4%
Net	19.0%	18.9%	19.8%	20.4%	2.3%
FCF/Revenue	29.2%	29.0%	27.7%	28.5%	28.5%

Y-O-Y Growth	9/30/2006	12/31/2006	3/31/2007	6/30/2007	9/30/2007
Revenue	34.1%	31.1%	29.2%	29.3%	29.3%
Earnings	5.0%	4.0%	16.8%	33.7%	(84.5%)

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
To me, R&D spending is the key to the kingdom as far as eBay is concerned. Today's online marketplace is far from the fledgling country fair it was just a few years ago, and eBay seems genuinely committed to investing in its own future. The company spent 37% more on research and development in the last quarter than it did a year before. The hunger to succeed is still there, in other words.

Fresh rumors say that Meg Whitman might retire very soon, handing the reins to unit president John Donahoe. That kind of drastic change at the top would likely send the share price down in the basement while Mr. Market sorts out what Donahoe can do. But Whitman and Donahoe have a common background stretching into the early 1980s at Bain & Company, so it's a safe bet that the new direction will stay close to the old course.

Would I buy eBay today? It's tough to resist a slice of those growing cash flows at the prices we're given today. But don't take my word for it -- grab a free 30-day trial to our flagship Stock Advisor newsletter, where eBay has been a recommendation for almost six years. Our Foolish founding fathers have plenty of insight to share on the stock.

Further Foolishness:

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• Is MercadoLibre the Next eBay?
• Duel Revisited: Bully for eBay