Foolish Forecast: eBay Wants to Forget Skype

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"Get me to the train on time;
Here, take this nickel, make a dime.
Take this penny and make it into a necklace when I leave!"

-- "Auctioneer (Another Engine)," by R.E.M., from Fables of the Reconstruction, 1985

Online auctioneer eBay (Nasdaq: EBAY) will report first-quarter earnings on Wednesday night. Glance back at last quarter's superb performance and somber news, then get back here for a fresh update.

What Fools say:
Here's how eBay's CAPS rating stacks up against some of its peers and competitors:

	Market Cap (billions)	Trailing P/E Ratio	CAPS Rating
Wal-Mart (NYSE: WMT)	$220.7	17.9	***
eBay	$41.9	124.6	***
Amazon.com (Nasdaq: AMZN)	$29.9	63.8	**
IAC (Nasdaq: IACI)	$5.6	N/A	***
MercadoLibre (Nasdaq: MELI)	$2.0	204.3	*****

Data taken from Motley Fool CAPS and Yahoo! Finance on April 15.

Our CAPS bulls love eBay's "counter-cyclical" tendencies and dominant position in the online auction sector. The critics don't like the new auction fee structure, and they're sorry to see Meg Whitman handing the reins to new leadership. Would she like a penny necklace when she leaves?

What management does:
The massive drop-off in net margins and earnings growth two quarters ago is a result of the $1.4 billion writedown of Skype's goodwill. Without that anomaly and other one-time items, the net margin has stayed relatively stable since last June, and the earnings growth has actually quickened from 25% last summer to 37.5% last quarter.

Margins	9/2006	12/2006	3/2007	6/2007	9/2007	12/2007
Gross	79.6%	78.9%	78.5%	78.0%	77.6%	77.0%
Operating	24.3%	24.0%	24.9%	25.3%	25.4%	26.1%
Net	19.0%	18.9%	19.8%	20.4%	2.3%	4.5%
FCF/Revenue	29.2%	29.0%	27.7%	28.5%	28.5%	28.5%

Y-O-Y Growth	9/2006	12/2006	3/2007	6/2007	9/2007	12/2007
Revenue	34.1%	31.1%	29.2%	29.3%	29.3%	28.5%
Earnings	5.0%	4.0%	16.8%	33.7%	(84.5%)	(69.1%)

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:
eBay may look expensive now, but that's the Skype monster rearing its talkative head once again. Back that $1.4 billion charge out, and the trailing P/E ratio becomes a very reasonable 24.8.

There are rumors impyling that some company, like Google (Nasdaq: GOOG), might be interested in taking the underperforming voice chat property off eBay's hands, which could erase most of the earnings write-downs in one fell swoop. Then again, it could be the makings of some kind of partnership between Skype and Google Talk, with much less monetary value to eBay.

The core auction business has proven rather insensitive to economic slowdowns, presumably because we'll go hunting for auction bargains in between dollar store runs when spending money gets tight. On the other hand, management warns us that the business model is becoming more diversified, which exposes the company to macroeconomics in new ways.

This company hasn't missed earnings estimates since 2004, and it's unlikely to break that habit now. eBay might one day become another stodgy retailer with deep connections to the economic health of the nation. But not yet.

Further Foolishness:

• eBay Takes It on the Chin
• 3 Reasons to Welcome a Recession
• Stocks on Bubble Watch