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eBay Rocks, But Microsoft Drops

Finally, some good news.

eBay met estimates last night with no accounting tricks, no "impaired investment" writedowns, no "restructuring" charges, just good old-fashioned growth. Forget the headline 12-cents-a-share, 3-cents-better-than-estimates number. Knocking out a 3-cent charge, which is, after all, real money lost, the company met estimates of 9 cents a share, up 200% from a year ago, and up a penny on a sequential basis. Real growth any way you look at it.

The company also raised estimates by 5%-10% for the second half of the year, to 21-22 cents a share for the next two quarters, and international growth - one of the company's stated goals - was strong.

The only problem, as we've said before, is that eBay is trading at twice its growth rate. But then again, so is every other leading tech stock. The difference is that eBay is delivering, and it's proved to be somewhat counter-cyclical, as more and more companies begin to use eBay to sell surplus goods.

Technically, eBay's picture is almost completely neutral at the moment (as opposed to Microsoft's, which we'll get to in a moment). If it closes below 60 before it can clear 70, it could be forming a head-and-shoulders top, which could give the stock downside potential to 50 or lower (see chart below). The 50-day moving average at 63.62 provided support yesterday.

And now for Microsoft . Why the company didn't see fit to issue its earnings warning for next quarter when it issued its positive pre-announcement for this quarter just a week ago is a question worthy of debate. The company saved the market - and MSFT stock - from the abyss by saying it would meet estimates for this quarter (excluding a whopping $3.9 billion charge, of course), but the SEC should probably be taking a closer look at what goes into company press releases in order to shore up public confidence in the system. "Pro forma" results, which are different than the GAAP results reported to the SEC, are just one place to look.

The result of Microsoft's warning could be a classic reversal pattern called an "island reversal" (see chart below). The stock gapped up above 70 last week on the company's positive pre-announcement, traded in the 70-73 range since then, and should gap below that level (69.87) when it opens this morning, stranding traders on an "island" who bought on the assumption that the news was good. That is the classic definition of an island reversal - traders changing their mind about the value of an event.

Also, Microsoft may be forming a bearish "broadening" pattern over the last two months, a series of three higher highs and two lower lows, reflecting volatility and indecision. A lower close, below the recent 64.48 closing low, could send the stock back to the mid-to-high 50s. There is a gap at 61.48-63.39 that could provide support, and a move above yesterday's high of 73 would be bullish.

Microsoft says it sees PC shipments deteriorating further before recovering in 2002, but it kept coming year estimates (June 2002) close to the current consensus ($1.91-$1.95 guidance, slightly below the $1.95 consensus estimate). But next quarter's results will be 10% or more below estimates (39-40 cents a share versus estimates of 45 cents a share).