Strong holiday sales point to eBay renaissance

Changes in the business model appear to be paying off for the online retailing and auctioneering giant.

By InvestorPlace Dec 8, 2011 2:48PM

By Anthony John Agnello, Consumer and Technology Writer

(© Tom Grill/Corbis)Don't call it a comeback -- eBay (EBAY) has been here for a long time. But the online auctioneer and e-tailer is on the uptick again, and this time, it could stick.

Raymond James analyst Aaron Kessler's upgrade of eBay to "strong buy" gave the stock a 4% bump Monday and it was hanging onto those gains Tuesday. Kessler gave the company a 12-month price target of $39 -- a hefty 25% above current valuations. EBay is currently hovering below its resistance point price of $31.18 (trading midday Thursday at $30.97), having fluctuated between $29 and $33 for months now.

However, Kessler's optimism is based on the company's shift to a new business model. The online auction site is slowly transforming itself into a more traditional Web retailer. That transformation could very well make it a contender in the regular online retail market among leaders like Amazon (AMZN).

EBay has implemented a series of changes to its auction business over the past year to make it an easier online shopping source. Changes have ranged from the incredibly simple -- adding a shopping cart function for buyers -- to more subtle, like reinstating free "Buy It Now" listings for independent sellers. (This means that customers can buy products for a set price.) On the whole, these changes have made for a quicker selling environment.

The results of those changes are reflected in the company's strong earnings. Total revenue rose to $3 billion, up 32% year-over-year, during the third quarter. Non-GAAP adjusted income came to $628.2 million, or 48 cents per share. Income would have been even greater, but eBay is still feeling the effects of its spending spree earlier this year.

At the time it reported those earnings, eBay's revenue expectations for the full fiscal year were around $11.6 billion, with earnings per share around $2.45, right in line with analyst expectations. That would signify impressive growth over fiscal 2010, when eBay turned in $9.2 billion in revenue with $2.3 billion in profits -- growth that's even more impressive considering eBay spent so heavily on new acquisitions this year.

All signs point to eBay meeting those expectations for the year, thanks to strong holiday sales. ChannelAdvisor, a company that helps merchants sell goods through sites like eBay and Amazon, reported that same-store sales on eBay were up 18% year-over-year in November -- and they grew 10% on Cyber Monday.

Where does this growth place eBay in the pantheon of online retailers? It still isn't near the head of the pack: Amazon. EBay's transaction service Paypal might outperform Amazon Payments service, but Amazon's quarterly income (around $10 billion) nearly matches eBay's yearly take. Unless eBay dramatically restructures how it generates revenue from its core business, it simply can't compete in raw financial terms. However, its current rate of growth proves that a shift away from the slower-moving auction model to an Amazon-like retail model has eBay on the right track.

As of this writing, Anthony John Agnello did not own a position in any of the stocks named here. Follow him on Twitter at @ajohnagnello and become a fan of InvestorPlace on Facebook.

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