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ANALYST WATCH: eBay distances itself from &#039Net pretenders

eBay's impressive first-quarter results gave investors every reason to believe in one of the few profitable Internet companies catering to the consumer market.

Analysts say the online auctioneer will continue to distance itself from both its competitors and the pack of iffy Internet stocks that have given many investors so much heartache in the past few months.

While the upgrades and revenue revisions came to light this week, even the most ardent eBay supporters want investors to prepare for more volatility throughout the summer.

In the quarter, eBay (Nasdaq: EBAY) doubled the consensus estimate, earning $8 million, or 6 cents a share, on sales of $85.8 million.

Adding fuel to the fire, it announced a 2-for-1 stock that will take effect May 24.

"With gross margins in the mid-70s and lots of room for growth in their core businesses, eBay's generating strong momentum," said Bob Fontana, an analyst at Wachovia Securities. "There's a real shakeout of the Internet stocks right now and we expect eBay to continue distancing itself from the pack."

Fontana, who upgraded the to a "strong buy," said that while eBay's trailing price-to-earnings ratio is a staggering 1,492, his model puts its future P/E at around 225. Pricey, but not unreasonable.

"I know as soon as I say this, I will jinx them but appears the technological issues that plagued them in the past are behind them," he said.

Dain Rauscher Wessels analyst George Sutton also upgraded the stock this week, bumping it to a "buy" from a "neutral" rating.

Merrill Lynch's Henry Blodget gave eBay an "A-" grade for the quarter, raising his 12-month price target to $200 a share from $175 a share and upping his fiscal 2000 sales estimate from $381 million to $403 million.

"(eBay) is transitioning from hyper growth to long-term growth, so we don't see any major near-term catalysts," Blodget said in a research note. "We expect the stock to remain volatile but trend higher over the next year."

Most analysts pegged eBay for first-quarter sales just under $80 million. More impressive, it posted a slight operating profit as opposed to the loss most analysts had predicted.

The $85.8 million in sales marks a 100 percent jump from the year-ago quarter when it made $4.8 million, or 4 cents a share, on sales of $42.8 million.

Its registered user base jumped to 12.6 million in the quarter, up 230 percent from the 3.8 million users it serviced in the year-ago quarter. In addition, it hosted more than 53.6 million online auctions, a 133 percent improvement from the 22.9 million auctions it hosted this time last year.

Gross profit margins jumped from 70.8 percent in the fourth quarter to 72.9 percent this time around, also above analysts' estimates while helping to move more than 1.15 billion in merchandise.

It also reported an 84 percent sequential increase in sales in Europe during the quarter.

"eBay's new initiatives are doing well, but they still only have about 6 to 10 percent of the collectibles market," Fontana said. "There's still lots of room for growth."

Twenty-two of the 27 analysts following the stock maintain either a "buy" or "strong buy" recommendation.