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eBay surges on rosy earnings

Shares of eBay jump in morning trading after the online auction company says third-quarter revenues rose 94 percent and the company beat analyst expectations.

Shares of eBay rose in morning trading Friday after the online auction giant said third-quarter revenues rose 94 percent and the company beat analyst expectations.

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What's in store for eBay
Lauren Cooks Levitan, analyst, Robertson Stephens
The stock jumped by as much as 12 percent before settling back to $62.25 up $5.06, or roughly 8 percent, in early trading on the Nasdaq.

On Thursday, eBay posted net income of $15.2 million, or 5 cents per share, on revenues of $113.4 million. Excluding noncash and stock-related charges, eBay's net income was $19.1 million, or 7 cents a share.

For the same period last year, the San Jose, Calif.-based company posted earnings of $3 million, or 1 cent per share, excluding the same charges, on $58.5 million in revenue. Analysts expected eBay to earn 4 cents per share in the third quarter of this year excluding the charges, according to a survey by First Call/Thomson Financial.

eBay's gross profit margins improved from 71 percent in the third quarter of last year to 79 percent in this year's quarter. Gross profit margins mark the difference between what eBay charges for its services and what those services actually cost the company.

"On the surface, it looks like it was a very, very strong quarter," said Derek Brown, a financial analyst who covers eBay for WR Hambrecht.

Analysts have closely watched eBay's profit margins because they give an indication of how profitable the company can be overall. Last year, the company's margins slipped as eBay spent heavily on technology to increase the stability of its computer systems.

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The number of registered eBay users increased to 18.9 million during the third quarter, compared with 7.7 million at the end of the same period last year. The company reported that gross merchandise sales reached $1.4 billion during the third quarter, up 83 percent from the year-ago period. Gross merchandise sales are the value of the goods and services sold through eBay during the quarter.

Although both the number of eBay members and the company's gross sales rose significantly, gross merchandise sales per average member declined during the quarter from about $91 in the second quarter this year to about $78 in the third quarter.

Stressing that the company was "pleased" with the growth in its member base, eBay chief executive Meg Whitman said the company was not overly concerned with the decline in gross merchandise sales per member.

"We're going to continue to see that number bounce around," she said.

WR Hambrecht's Brown said the decline in sales per member did not concern him too much, but added, "I'd clearly love to see that flatten out and increase."

Stock price from October 1999 to present.  
 Source: Prophet Finance
Last month, eBay representatives told analysts and investors that the company expects to reach $3 billion in revenue by 2005. To reach that figure, the company would have to report an average of 50 percent growth each year until then.

Company executives stood by those numbers Thursday in a conference call with investors. Gary Bengier, eBay's chief financial officer, said eBay expects the growth of each of its various businesses--from its small-business exchange to the recently acquired help fuel the growth of other businesses.

"We think the rate of growth can continue to be quite high," Bengier said. "We're quite comfortable with having continued high growth."

Jeetil Patel, a financial analyst at Deutsche Banc Alex Brown, said the biggest concern for investors should be eBay's valuation. With the market moving toward valuing Internet stocks based on their actual earnings and not on their growth rates or revenues, eBay's stock could drop, despite exceeding expectations. At its current stock price, the online auction giant is trading at 200 times its projected 2001 earnings, Patel noted.

"Valuation is the key consideration here," Patel said. "This is not for the faint-hearted. Even though the business is good and solid, it's a matter of what you should be paying for this particular stock. There's a fair amount of risk that the stock does trade lower based on market issues."