Ebay’s Southern Ride

For the first time since late February, shares of online auction giant
eBay fell below $100 Tuesday morning, just one day after the online
auction company reported a 70 percent drop in profits during a quarter marred by several serious technical outages.

But it’s hard to argue that the market is punishing eBay for the
disappointing report, since EBAY shares have been on a grim march south
since closing at $215 on April 29.

Granted, for several weeks eBay had a lot of company in its rapid
journey down the charts, but many other Internet leaders bottomed out by
June and have since regained much of their losses. (RealNetworks, for
example, closed at a split-adjusted high of $110.75 on April 30. By June
14 it had plunged to $52.50. It rallied, however, and as of Tuesday
afternoon, RNWK shares were trading at $85.)

The irony is that virtually every other Internet company would trigger a
run-up if it reported any quarterly earnings at all, never mind the
$816,000 eBay had in Q2, for profits still are rare in cyberspace.

eBay would have reported more than $4.7 million in earnings if it hadn’t
had to give users $3.9 million in credit as compensation for a one-day
service outage in June that prevented any bidding. That was the most
serious interruption of service (and thus revenue). There were many
others, and a number of irate customers expressed their displeasure in
chat rooms and newsgroups.

However, judging by figures announced Monday, eBay customers are
forgiving. The number of registered users increased from 3.8 million in
Q1 to 5.6 million in the second quarter, an impressive 48% growth rate
over three months.

No doubt this is due in great measure to the strength of eBay’s brand.
It also is the favorable result of eBay’s sheer size, for grumble though
they will about the inconsistent hours, eBay customers — both buyers and
sellers — feel the site is the biggest and best bazaar online. When your
goal is to move merchandise or find the best selection and price, you’re
willing to forgive some inconvenient store hours.

Investors, though, may see eBay’s persistent technical woes as
potentially fatal flaw. For while eBay is the runaway leader in the
online auction space, with a mindshare exceeded only by household names
such as AOL and Amazon.com, it has dozens of competitors nipping at its
heels, including online bookseller Amazon.com, which announced in Q2
that it would enter the auction business.

eBay has to move quickly to allay concerns that technology problems will
limit revenue growth long-term. Until it does, shares of EBAY will have difficulty regaining the altitude they enjoyed in the spring.

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