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More Jeers Than Cheers for eBay

The good news is that eBay (Nasdaq: EBAY  ) is growing. The bad news is that it's not growing as quickly as it used to.

The company behind PayPal, Skype, and the namesake online marketplace posted respectable second-quarter results given the iffy economy. Revenue inched 20% higher, to $2.2 billion, from last year. Adjusted earnings rose 25% on a per-share basis, to $0.43 a share. Wall Street was looking for a tweaked non-GAAP profit of just $0.41 a share on a more modest 20% top-line uptick.

Hooray for eBay?

Well, not so fast. Dig into the numbers, particularly the company's flagship marketplace business, and things aren't exactly peachy keen.

Three jeers for eBay
Let's go over a few cheerleading points, if only to unearth the fact that the pom-poms may be a little lighter than you think.

1. Earnings per share are growing faster than revenue, so net margins are improving!
Not so fast, bucko. The key part of that 25% bottom-line growth gauge is that we're talking about "per-share" performance. The company bought back 19 million shares during the quarter and more than that over the past year. That's great for shareholders, but actual non-GAAP net income aped the 20% growth in revenue.

2. Evil defecting power sellers claim that eBay is dying, but it's actually still growing!
Yes, but it's all relative. Growth is decelerating through all of eBay, especially in its bread-and-butter marketplace business. That segment grew by just 13% during the year, and that's padded by the rising popularity of Kijiji and StubHub. Actual GMV (gross merchandise value) sold through eBay's websites during the quarter rose by just 8%, and that figure becomes just a 4% advance if you adjust for foreign currency translations. Listings are up, perhaps peppered by the company's deal with to populate the site with retail content, but conversion rates and average selling prices are down.  

3. That's all right. That's OK. We don't need the namesake website anyway!
PayPal is a star. Revenue climbed 33% to $602 million on a 35% spurt in payment volume. Most of the growth is naturally coming from outside of the decelerating realm of transactions. It's a testament to PayPal's ability to grow its merchant platform even when bumping up against Google's (Nasdaq: GOOG  ) Checkout.

Skype is growing even faster, with its revenue shooting 51% higher, but Skype still commands a mere 6% slice of the revenue mix pie here. Despite eBay's efforts to diversify, the marketplace slice of the revenue mix has only shrunk, from 66% of total revenue to 57% over the past two years. 

Smells like lean spirit's second quarter proved to be a clash of contrasts. The economic stimulus checks that began going out in May probably spurred activity on the site, but it didn't help the company's eBay Motors division, where year-over-year growth was flat. Sure, that's a lot better than the sorry state over at General Motors (NYSE: GM  ) on the new-car side, but what happened to e-commerce outpacing retail growth? Used-car specialists America's Car-Mart (Nasdaq: CRMT  ) and CarMax (NYSE: KMX  ) posted year-over-year revenue growth of 29% and 3%, respectively last month.  

Then we have eBay's guidance. The company's new outlook calls for adjusted earnings of $1.72 to $1.77 a share this year, on $8.8 billion to $9.05 billion in revenue. It is slightly higher than its outlook from three months ago, but the ratcheting consists exclusively of the better-than-expected second-quarter results. The company is leaving its second-half outlook unchanged.

Normally that wouldn't bother me. eBay is a renowned sandbagger. It lays out conservative guidance, only to crush those targets. I'm not so sure that eBay has the agility to keep that up, though. The deceleration -- at all three of the company's flagship verbs -- is sobering. Wasn't eBay supposed to be a recession-resilient company that attracts thrifty deal-seekers in tight times? 

It all starts with itself, where the headcount of 84.5 million active users is a mere 1% improvement over the roll call a year ago. eBay may claim that active users would have risen by 6% if you back out the company's retreats in China and Taiwan, but that's not a ringing endorsement. If you want some skin in the overseas auction action, hop on the faster horses provided by South Korea's Gmarket (Nasdaq: GMKT  ) , China's Taobao, and Latin America's MercadoLibre (Nasdaq: MELI  ) . 

Until eBay's growth begins to accelerate, it's only natural to expect its earnings multiple to continue to contract. A couple of years ago, buying eBay with a P/E ratio in the high teens would have seemed impossible. These days, it's not only possible but well-earned.

Like the items being swapped on itself, folks aren't getting bargains just because the average selling prices are lower. There is more to that story. There is more to that hollow cheerleading. It's halftime at eBay, and the locker room isn't exactly buzzing heading into the second half.

More items in the eBay playbook:

CarMax is a Motley Fool Inside Value recommendation. Google and Gmarket are Motley Fool Rule Breakers picks. eBay is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletters today, free for 30 days. You'll get access to all past and present recommendations of stocks to buy, and the analysts' reasoning behind each decision.

Longtime Fool contributor Rick Munarriz is a satisfied eBay user with 173 positive feedbacks to show for it. He does not own shares in any of the companies in this story. He is 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.

Read/Post Comments (2) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 17, 2008, at 2:16 PM, Patricia013 wrote:

    People are looking at Ebay in the wrong light. This is the type of economy where bargains on Ebay should excel. People should be looking to Ebay first for whatever they need and expect to get it cheaper there. Such is not the case. The last fee "decrease" cost most sellers an extra 3+% on their final value fees (fees that are a percentage of the sale price). To most sellers this was an INCREASE no matter what Ebay says. Now, we're faced with yet another such "decrease" - because, frankly, ebay's new wacky policies are discouraging sellers and their revenue is dropping! With every one of these fee hikes sellers lose more of their profits, raise their prices and hope for sales. In this economy...its not going to happen. Instead, many sellers are discovering they can go to another venue and perhaps get free listing and a much smaller final value fee and are able to offer their items for way less then on Ebay....end result - SALES!!! Ebay cannot see this - they've become big and bloated and have to tow the mark to try to look extremely successful when all they've been doing is throwing roadblocks in seller's paths, hitting them with various fees and restricting how they can even show their items on the space they rented! Ebay needs to go BACK to the way it was before January of this year. They need to encourage sellers and HELP them to make sales rather than treat them like a herd of cattle being "milked" for revenue! They cannot seem to grasp the reality that every fee raise without any appreciable raise in buyers knocks more sellers out of the box! I won't even go into the "improved" search that is so manipulated now that buyers get short-changed by not seeing what they want to see and sellers get short-changed because they're not big enough to get much exposure.

    "Ebay need to get off their duffs and physically start weeding out the worst fraud sellers and scam buyers, lay down some real safeguards to protect buyers and sellers and put some serious advertising into their business.

    Auctions aren't dying and in this type of an economy they should be increasing in sales by offering buyers bargains but sellers cannot offer bargains and feed Ebay's voracious appetite at the same time!

  • Report this Comment On July 19, 2008, at 9:23 PM, Pambie36 wrote:

    I've been an eBay seller for over five years and, at one point, supported my family from sales.

    The company has been heading in the wrong direction for years and has completely forgotten what made it so great to begin with - the charm, collectibles and bargains to be found by mom and pop sellers. EBay has taken the "Wal-Mart" philosophy & turned eBay into GreedBay, out for every last penny that they can get, while ignoring the roots of the company and LONG TERM positive growth (they're Republicans, what can I say?). They've treated sellers like dirt, taken far too long to address genuine fraud and are now pandering to high end businesses and dissing the small sellers who made them great.

    One thing I never see addressed in print is eBay's established practice of billing sellers for extras - such as selling features or their "marketplace research" (@ $24.99 a pop every month) - LONG after sellers have cancelled these features - to bump up their bottom line numbers. Call them on it - they refuse to give refunds.

    It's sad to see such a great idea go down the drain from mismanagement, fraud and greed.

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