Analysts pessimistic on eBay as management looks for something new

Wall Street, confound it, expects retailers to still make a profit during one of the worst retail environments in history. E-retailer eBay (EBAY) reports its first-quarter earnings today, and pessimistic analysts were scoffing that the expected return of 33 cents per share on $1.94 billion in revenue forecast by Thomson Reuters would not be enough profit to inspire confidence in the company's ability to generate further growth.

In its earnings preview, the Associated Press cites a note from Jeffries & Co. analyst Youssef Squali, who expects eBay management to meet expected earnings and give "a cautious outlook for the rest of the year due to weakened consumer demand and eBay's ongoing work to improve its marketplace." That's hardly a vote of confidence, but that sentiment is understandably fueled by fears the recession will worsen.

As the recession has caused analysts to expect weak consumer demand for most retailers since before the start of the year, perhaps the market should be focusing on how eBay is adjusting to the reality of a struggling economy, and what steps the company is taking to make sure the second quarter is not a disaster. eBay needs desperately to improve its marketplace business, because much of the volume it is losing due to the current slowdown is not likely to return any time soon.

Morningstar analyst Larry Witt expects eBay to lose about half of its auction listings over the next five years, primarily because some of its auction listing categories aren't effective. In spite of the decline in that area of it business, Mr. Witt said in an analyst note last week that "eBay owns an attractive portfolio of assets that if properly managed, can produce solid returns to shareholders."

By trimming less profitable areas of business and focusing on optimizing its core businesses, eBay is better positioning itself to capitalize when the economy starts to rebound. That should thrill investors who are not looking to make a quick buck. eBay's announcement that it will spin off internet communications service Skype in an initial public offering in 2010 allows the company to cut its losses on its $2.6 billion investment now and prepare for a cash infusion that can be returned to investors or used for acquisitions of companies that may fail to make it out of the recession later.

eBay's offer to buy all outstanding shares of e-retailer Gmarket for $24 a share, allows it to combine its online marketplace operations with its Korean competitor, making it a dominant player in the lucrative Korean market. "eBay will be able to cut costs by eliminating redundant back-office operations, using it larger scale to negotiate lower transaction processing fees, and consolidating marketing," said Mr. Witt in his note.

The successful acquisition of Gmarket would make eBay dominant in two core areas of its business that are poised for growth -- its marketplace business and its PayPal services. In March, eBay forecast that its PayPal business could grow its revenues from $2.4 billion last year to between $4 billion and $5 billion in 2011. The company says its marketplace business is forecast to grow to between $5 billion and $7 billion in 2011.

Considering some of eBay managements' past poor decisions, which include overpaying for Skype, its current moves leading up to its earnings report could be easing some of Wall Street's fears. Investors have already bid eBay's stock price up more than a dollar since the end of the first quarter on March 31, from $12.56 to $14.29 at the market close today.

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