Can eBay Keep the Mojo Going?

After a strong third quarter, and a merry holiday season in the cards, the big challenge may be investors' giddy expectations

By Robert D. Hof

With eBay's stock lingering near an all-time high of $96.60, investors have been holding their collective breath since the third quarter closed Sept. 30. On Oct. 20, they exhaled in relief -- at least for now. The online marketplace reported a higher-than-expected third-quarter profit jump of 77%, to $182.3 million, on a 52% rise in sales, to $805.9 million. eBay (EBAY ) also hiked its fourth-quarter forecast by 3%, to $915 million. Even though it didn't quite meet Wall Street's high expectations, investors who feared worse bid up the stock in after-hours by more than 2%.

"The company came in with very strong results," says David Garrity, analyst with Caris & Co. "The rumors of the stock's death were premature."

NO ILL WINDS.

  Now, the question is whether the most powerful force in e-commerce can maintain the momentum that has added more than 50% to the value of its stock since January. Clearly, it's still going full speed ahead. Even though U.S. revenues are no longer in hypergrowth mode, expanding 29% in the quarter, international sales are more than picking up the slack. They jumped 82%, to $282.3 million, thanks to strong growth ranging from China to Germany and Britain. Crowed Chief Executive Margaret Whitman: "Q3 was yet another outstanding quarter."

Despite the negative economic impact of the Florida hurricanes and a relatively late Labor Day, back-to-school sales boomed on eBay, in stark contrast to the experience of traditional retailers. "That bodes well for the holiday season," says Garrity. On eBay, at least, the yearend shopping spree may already be under way. Says Scot Wingo, CEO of ChannelAdvisor, which offers services to help merchants sell online: "We are already seeing a really nice uptick in holiday sales."

For all that, eBay faces challenges that could keep investors on edge. The key one: Can it keep up with endlessly buoyant expectations for growth? It has a heady $60 billion valuation, about seven times that of Sears Roebuck (S ), and its 2005 price-earnings ratio is 58, more than double that of Amazon.com (AMZN ).

"BUILT TO LAST."

  eBay upped estimates for the fourth quarter, bringing expected 2004 sales to $3.25 billion, or 50% growth. But next year's forecast calls for $4.2 billion, or 29% growth, a bit under what Wall Street had been expecting. That could put a lid on the stock.

An even bigger concern could be how much eBay will have to sacrifice short-term profits to invest in new growth-producing opportunities. In a conference call with analysts, Rajiv Dutta, eBay's chief financial officer, didn't hike profit-growth estimates for the fourth quarter -- traditionally eBay's biggest. The reason: continued spending on such initiatives as expanding in China and offering its Paypal payment-processing services in more countries around the world.

What's more, Dutta said eBay will commit 5 percentage points of operating profit margin next year to these and other new endeavors aimed at keeping eBay humming. That's apparently why eBay's estimate of about $1.50 a share in profits next year is considerably below the average analysts' estimate of $1.61. But eBay execs aren't backing down from a vow to keep investing in new projects that could pay off down the road. "Make no mistake, eBay is being built to last," said Whitman.

"IT EXECUTES."

  Bottom line: eBay's growth still far outpaces that of e-commerce rivals such as Amazon, which reports earnings after the market's close on Oct. 21. At the same time, its millions of sellers can turn on a dime as the economy shifts.

"Economic shocks like the election and the high price of oil aren't going to affect it that much," says Scott Kessler, an analyst with Standard & Poor's. "It's a great franchise, it has a superb business model, and it executes. You can't really do much more." Maybe not, but these days, investors may demand more anyway.

Hof is BusinessWeek's Silicon Valley bureau chief