Another service outage sends eBay shares south

Shares of eBay Inc. (Nasdaq: EBAY) plunged 7 13/16, or 8 percent, to 85 1/16 Friday after the online auctioneer was crippled by yet another service outage. Despite the company's reassurances, Wall Street is starting to lose faith.

What makes Friday's development so unsettling is the ironclad guarantees made by eBay management that something like this would never happen again.

Back in late June and early July, the site had multiple outages, blamed primarily on software developed by Sun Microsystems Inc. (Nasdaq: SUNW).

The outage had a very real impact on eBay's second-quarter earnings. Company officials said it lost between $3 million to $5 million in revenue last quarter due to the technical difficulties.

eBay did manage to beat Street estimates in the quarter, earning $5.1 million, or 4 cents a share, on sales of $49.5 million. But those outages cost shareholders at least a penny a share in earnings.

That's substantial for a company that only earned 4 cents a share in the quarter.

"Up until today, eBay had overcome those problems and had all the momentum in this business model," said Steve Weinstein, an analyst at Pacific Crest Securities. "Because they were so forceful in their contention that it would never happen again, it definitely raises a bit of a credibility gap that they must now overcome."

While Amazon.com Inc. (Nasdaq: AMZN), Yahoo! Inc. (Nasdaq: YHOO) and other online outlets have ramped up their auction features, eBay still holds a commanding lead.

Last quarter, it facilitated about 30 million auctions and added 1.7 million registered users, giving it a total of 5.6 million clients.

"eBay has such a commanding lead that it needs only to execute at an average level," Weinstein said. "Now, they're executing at a below average level. It's not the death of them, but it's not good."

After last month's outages, CEO Meg Whitman said the company would spend millions to ensure this wouldn't happen again.

"We know we must provide continuous service for our community, and that we have let our community down," Whitman said in July. "We will not rest until we make sure that this problem will not occur again and that we make things right for our users."

Now it's eBay investors who aren't sleeping.

To blame the deterioration in eBay shares on those outages would be na?ve, considering the entire Internet sector has been pummeled in the past two months.

However, eBay shares have tumbled from a 52-week high of 234 in late April to around $85 a share. That was, in fairness, after the stock split 3-for-1 in March.

More intriguing, eBay will hold its annual analyst conference Monday in San Francisco. You can bet this latest snafu will be topic No. 1.

"All I'd want to ask them is when is it going to be fixed and what are you doing to make sure it never happens again?" Weinstein said.

First Call consensus expects eBay to earn 1 cent a share in is third quarter and 11 cents a share in the fiscal year.

Twelve of the 15 analysts following the stock rate it either a "buy" or "strong buy."