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Anticipating eBay's earnings

Profitable online auctioneer eBay, which claims one of the strongest IPOs this year, is set to report earnings.

Although numerous other Internet companies have seen their stock prices plummet or IPO plans dashed in 1998, online auctioneer eBay has already turned a profit and claims one of the most successful initial public offerings of the year.

Today, the San Jose company will report its third-quarter earnings after the market closes. Industry analysts are speculating revenue could be higher than previously expected.

Shares of eBay continued to surge today ahead of its earnings news. The stock was up 18.57 or 13.63 points, to 87. Today's jump follows yesterday's rise of more than 46 percent when the stock reached 73.375--marking a new all-time high--after investment bank Donaldson Lufkin & Jenrette initiated coverage on the company with a "buy" rating.

Financial analysts expect the company to earn 3 cents a share for the third quarter, according to First Call, with estimates ranging from 2 cents to 4 cents a share. Analysts are looking for eBay to report revenue at $10 million--but they admit those estimates could be conservative.

Founded in 1995, eBay has become one of the

Meg Whitman
Meg Whitman
leaders in the booming person-to-person merchandise sales market by blending auctions with classified ads online. But eBay faces intense competition as e-commerce companies realize the potential of the person-to-person sales market.

As a handful of online auctioneers jockey for position, eBay admitted in a prospectus that a major newspaper with classified ad experience, or a company such as television retailer QVC, could significantly impact its market share. Online auction sites also face the daunting task of guarding customers' confidential information, such as credit card numbers. As sales increase and hackers become more sophisticated, security breaches remain a devastating possibility.

The company has already come under fire for its role in sales between buyers and sellers and its advertising practices. It denies any wrongdoing.

A loyal following of more than 1 million registered users, analysts said, has led to solid brand-awareness at eBay--despite limited marketing spending.

"They've been able to grow so dramatically purely by word of mouth," said BancBoston Robertson Stephens principal Lauren Cooks Levitan.

eBay expects to increase spending on marketing for continued growth. Any upside in revenue could boost the company's marketing efforts, which began in earnest when eBay recently launched a radio campaign.

Cooks Levitan said she expects the company to spend $14.2 million this year on advertising, up from $1.7 million last year. "Once they start marketing themselves there's no telling how big they could be," she said.

Earlier this month, the company began offering personalized home page building on the site--one of the most popular features on many portal sites--hoping to capitalize on that sense of community. eBay already offers a bulletin board chat function.

"eBay displays all of the characteristics of an Internet category leader: a huge market opportunity, significant competitive barriers, an increasing returns business model, and a massive, loyal, and growing customer base," DLJ analyst Jamie Kiggen wrote in his report yesterday. "eBay is one of an elite group of consumer Internet companies, including AOL, Yahoo, and Amazon, that has tremendous early-mover advantages in a huge category."

Kiggen pegs the global second-hand merchandise market at $180 billion, and Cooks Levitan estimates that the U.S. person-to-person sales market is worth about $100 billion annually. "The Internet is the obvious way to dispose of this stuff. There's enough people out there willing to buy almost anything," Cooks Levitan said.

The company lists more than 800,000 items for sale in nearly 1,100 categories with popular areas such as antiques, collectibles, and sports memorabilia. "One man's trash is another man's treasure, that's really what you have going on here," she said.

To help craft strong sales strategies, e-commerce companies are increasingly reaching out to executives with a background in traditional retailing and sales. In May eBay named Meg Whitman, previously with Hasbro and Disney, as chief executive officer.

Like other auction sites such as Onsale, First Auction, and Value America, eBay doesn't have the same inventory risks and infrastructure investment obligations that other electronic retailers might. And because buyers and sellers negotiate the terms of each deal and personally ship the merchandise, eBay doesn't have to fulfill any sales directly.

"Since it's a fee-based business, their costs don't increase incrementally with their revenues," Cooks Levitan said.

eBay makes money by charging two fees directly to its sellers' credit cards; buyers pay no fees on the site. Sellers pay a listing fee for placing their products on the site as well as a closing fee, or a percentage of the selling price, when the auction is completed.

For an additional fee, sellers can make their product the featured auction in a given category or add other services--which means more revenue for eBay with almost no additional costs. That potential for continued growth has excited investors and financial analysts alike.

eBay had one of the most successful technology initial public offerings this year when its shares shot up more than 163 percent on its first day of trading. Its September offering was the first IPO in nearly a month and came amid a stock market slump at the end of the summer. Many high-tech companies have pulled the plug on their IPO plans, and some continue to delay offerings, citing weak market conditions.

eBay shares have traded as high as 54.25 and as low as 25.25 since the IPO. DLJ's Kiggen has set a 6- to 12-month price target of $100 per share for the stock.

Meanwhile, eBay competitor Onsale saw its stock rise 21 percent to 18.5. Shares have traded as high as 36.8125 and as low as 10.625 in the past 52 weeks. Yesterday the company announced that 8 million bids have been placed since the site's inception.