Rock-a-Buy eBay

It was another mixed quarter at eBay (Nasdaq: EBAY  ) , even though this tug-of-war found the optimists muscling a little more pull than the pessimists. Reported earnings rose just 10% to $0.20 a share -- but that figure goes up to $0.23 a share once you add back stock-based compensation costs, and shoots up to $0.26 a share once you also add back amortization costs related to the company's recent acquisitions. It's on that basis that analysts were expecting earnings to come in at only $0.24 a share. The top line inched 31% higher, slightly ahead of Wall Street's revenue target. Advantage: Bulls.

Growth has slowed in eBay's flagship marketplace business, but that's not necessarily news. Globally, eBay still facilitated the exchange of 17% more in gross merchandise value. Its marketplace net revenues grew by 22%. You can spin that as a positive, but you would be missing the bigger picture here. I'm always concerned when the amount eBay is charging is growing more quickly than the value it is delivering to its merchants. With so many outlets emerging for thrifty sellers, this is something to watch over the next few quarters. Advantage: Bears.

PayPal continues to grow more quickly than its namesake auction business, soaring 41% higher over the past year. With a wider reach beyond sealing the deal after successful listings, this may be the real reason to get excited about eBay. It now accounts for 24% of eBay's revenue pie. Advantage: Bulls.

Skype is the third verb in the eBay portfolio. It's the speedster here, yet I am troubled to find that the number of subscribers grew by 20% sequentially while revenue only rose by 13% over its June quarter showing. The company argues that the disparity took place because a lot of the new user growth was in the thriftier Asian region, but that's also not much of a selling point if its greatest growth is taking place where users will be spending less. I can't give the cynics the advantage here, because Skype is still in a major growth spurt, but let's hope that eBay will be able to monetize Skype more effectively in the future. Advantage: None.

Beyond the scorecard
How does that score? 2-1-1? That's not too shabby for eBay. Even the bearish grade for the company's eponymous business can improve if we dig deeper. The company's eBay Express feature -- which seemed hokey to me back in January -- is apparently working. Providing buyers with a more conventional checkout experience by allowing them to consolidate several items in a single purchase has resonated with users. Patrons using eBay Express are spending more time on the site and also spending 25% more money on the site. It's a nice trend, especially as we head into the holidays, when you just know that eBay will be chanting, "Elmos, PS3s, and Wiis -- oh my!"

The company is also ready to start incorporating Google (Nasdaq: GOOG  ) text ads into its international sites. That would be heretical domestically, where sellers are already smarting from higher fees. Serving up contextual distractions would likely be the last straw, sending merchants off to launch paid search campaigns directly with the consumer through sites like Google, Yahoo! (Nasdaq: YHOO  ) , and Microsoft's (Nasdaq: MSFT  ) MSN.

However, this is the right approach overseas, where the company has to charge substantially lower fees in battling it out against free and dirt-cheap rivals. Google AdSense is the perfect way to monetize operations more effectively in those cutthroat markets.

That may even be the secret ingredient to making things work in China. Just a few weeks ago, all of the rumor mill chatter was pointing to eBay bowing out of the Chinese market and handing over its auction and micropayment business there to TOM Online (Nasdaq: TOMO  ) .

Retreat wouldn't be something new to eBay. It had no problem bowing out of Japan when it saw that Yahoo! Japan had built an insurmountable lead. However, China is too big and too early in its development to give up on so easily. In fact, eBay is committed to making its eBay-PayPal-Skype trifecta work as seamlessly as possible in China. Asia taking to Skype so well is just one more reason for it to keep a presence there.

Time to hit the "Buy it Now" button
It's still unclear how the three pieces of the eBay puzzle will come together over the next few years. It marketplace grasp feels vulnerable. Incorporating Skype seemed good on paper, but am I the only one concerned that voice chat between buyer and seller may move more completed transactions off to the side? Then we have PayPal. Big, bold, and beautiful PayPal. It defeated giants like Wells Fargo (NYSE: WFC  ) and Citigroup (NYSE: C  ) during the dot-com bubble days, and it's doing a pretty good job of relegating Google Checkout's introduction this year to non-event status.

With eBay shares trading nearly 40% off their January peak, I'm inclined to approach this as buying in for PayPal and getting Skype and eBay as bonus gravy.

Thankfully, eBay swallowed whole is starting to look pretty compelling anyway. The company has been aggressively buying back stock. It is looking for earnings to grow by at least 20% next year. Sure, free cash flow dipped this past quarter after the company made big investments in software and data centers, but you can't expect to pay imperfect prices for perfect stocks.

Welcome back, eBay. You were missed.

eBay, TOM Online, and Yahoo! are activeMotley Fool Stock Advisornewsletter recommendations over the years. Microsoft is anInside Valuepick.

Longtime Fool contributor Rick Munarriz is a satisfied eBay user, with 169 positive feedback recommendations to show for it. He does not own shares in any of the companies mentioned in this story, and he is a member of the Rule Breakers analytical team, seeking out the next great growth stock early in its defiance.


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