By Rob Hof After disappointing results all year, eBay is suddenly giving investors reason to smile again. Buoyed by renewed growth in its core U.S. and German operations, the online marketplace reported better-than-expected second-quarter results on July 20. Profits jumped 53%, to $291.6 million, or 21 cents a share -- 4 cents above analysts' expectations -- and eBay (EBAY) upped its profit and sales estimates for the rest of the year.
"eBay is still a very high-growth business," says Scott Devitt, an analyst with Legg Mason Wood Walker. "The quarterly results go a long way in pointing this out to the investment community."
Indeed, the surprise report lit up the after-hours ticker as investors bid up the stock by as much as 15%. It had fallen 1%, to $34.87, before the announcement, and was down 39% since the start of the year. For months, it has suffered the wrath of investors as well as its own sellers, some of whom are angry about recent fee increases. Meanwhile, alternative buying and selling channels such as Google (GOOG) and Amazon.com (AMZN) were threatening to cut off eBay's growth.
NEW INITIATIVES. The latest results indicate that eBay may be emerging from that rough patch. For one thing, U.S. revenue growth, which had been slowing for several quarters, rose to 27%, from 20% in the first quarter. In Germany, its second-biggest market, growth also improved after accounting for the impact of a stronger dollar. Overall, sales rose 40%, to $1.1 billion, up from a 36% growth rate in the first quarter. "This was all about increased volume" of trade, eBay Chief Financial Officer Rajiv Dutta told BusinessWeek Online.
Several new initiatives led the return of higher growth. For one, eBay introduced some new selling methods, such as "Want It Now," which allows buyers to put out requests for products they want, and "Best Offer," a new method of haggling over higher-price items. These new initiatives helped boost both average selling prices and the rate of successful transactions, Dutta says. Even so, eBay managed to reduce spending on product development as a percentage of revenues.
Interestingly, the much-criticized fee increases on eBay Stores, the separate merchant storefronts that eBay hosts, also appeared to aid growth. The higher fees prompted some merchants to place merchandise that had been sitting in eBay Stores onto eBay.com instead, where it often sold. Even as sellers grumbled, the number of eBay Stores in the U.S. has risen 12%, to 173,000, since the February fee hikes. "Those price increases had precisely the effect we wanted," Chief Executive Margaret Whitman said in a conference call with analysts.
"UNANSWERED QUESTIONS." Also boosting results was eBay's online payment unit, PayPal, which saw accelerating growth as net payment revenues jumped 51%, to $244 million. PayPal has been aggressively pushing to expand business beyond eBay.com by signing deals with the likes of Apple's (AAPL) iTunes Music Store. "We saw strong growth across all parts of our business," Whitman said during the call. "Our Q2 results indicate that [merchants] continue to see real value to the eBay marketplace."
eBay's positive earnings haven't entirely quieted concerns about its prospects. It's still unclear whether the improvement is sustainable, says Pacific Growth Equities' Derek Brown, one of only two analysts with an underweight rating on eBay. Brown isn't sure what drove the renewed growth, since eBay didn't provide precise figures on the benefit from new features and fee changes, nor explain how it reduced product-development costs. "It was a very good quarter," he says. "But there are a lot of unanswered questions."
Moreover, Google, which reports earnings July 21, continues to attract many small and large merchants, who in some cases find that buying search keywords can pay off better than selling on eBay. And rivals such as Amazon and Overstock.com (OSTK) are coming on stronger.
MOJO RISING. eBay isn't backing down. It plans to keep up increased spending on marketing and new product development and incorporate a flurry of recent acquisitions, such as comparison-shopping site Shopping.com and housing site Rent.com. That won't be easy, since these sites do business much differently than eBay's mostly auction-oriented model.
But for now, it appears that the 10-year-old company has regained some of the mojo it lost in January, when slowing growth in the fourth quarter knocked its stock down by almost 20% in one day. Indeed, it's possible that eBay's results may spur renewed interest in e-commerce companies, which investors have been abandoning for higher fliers such as search giant Google.
"I feel we're getting closer to the end of this concern by investors about e-commerce," says Allison Thacker, co-portfolio manager of the RS Internet Age Fund at RS Investments of San Francisco, which doesn't currently hold eBay shares.
BACK TO COMMERCE? With its stock down 38% since the start of the year, eBay has become more attractive lately to some analysts, too. Before the latest earnings announcement, at least two analysts recently upgraded their ratings to buy, with 13 of 25 analysts tracked by Thomson/First Call rating eBay stock a buy or strong buy. Eleven had a hold, and one had a sell rating.
Despite eBay's improved results, e-commerce players in general still may face an uphill battle to persuade investors that they continue to be growth companies. That includes Amazon, which reports second-quarter results next Tuesday. "Our portfolio has naturally moved away from e-commerce, where companies have had disappointing earnings, toward online advertising," says Thacker. But for now, at least, eBay has provided one reason to rethink that trend.
Hof is BusinessWeek's Silicon Valley bureau chief