Earnings come out right, left and center today and Wall Street can’t keep up. Trading gets very erratic as the indices trade sideways for much of the session. The weak gain in the Conference Board’s leading economic indicators only adds to investors’ ambivalence. It’s already clear the economy will slow in 07, and the mixed earnings picture so far supports this view. The major indices edge up on steady volume.
In folio action, EBAY sizzles on the back of stronger-than-expected earnings and favorable guidance for Q4 and 2007. I’ve always suspected that EBAY’s near-term fortunes are tied to PayPal. After listening to yesterday’s earnings call, my conviction is stronger. The growth of the online auctions business has tapered off – especially in key markets of the US, UK and Germany. Emerging Markets is where it’s at now for their auctions business, but competition here is fierce, to put it mildly. BTW I’m glad EBAY’s decided not to cut and run from China like it did in Japan.
What about Skype, EBAY’s “communications” business? I’m still not convinced about how profitable this could be for EBAY. Not only does it face competition from guys like Vonage, the giant Telcos see Skype as nothing but a market grabber hiding behind the internet. From what I hear these “Ma Bells” have significant lobbying power in Washington. Regulatory uncertainty is a considerable risk for Skype and others like it.
Enter PayPal. It already accounts for 24% of EBAY’s top-line. This share is bound to increase as PayPal grows faster than the other two businesses. Right now, PayPal is the only EBAY business that is taking no prisoners in its sector. MoneyGram and Western Union are already feeling the heat. Watch out Visa and MasterCard! So the purchase of PayPal is the best thing that’s happened to EBAY since its IPO. However, PayPal alone won’t save EBAY. I’m sure management knows this, so am holding on to the stock. Unless something disastrous happens, like a sale of PayPal. Then I’ll file for divorce!
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