WALL STREET Despite strong stock, eBay still faces tough issues

The company is estimating it'll make $3 billion in 2005.
KNIGHT RIDDER NEWSPAPERS
At the moment, Wall Street says eBay, the online auction giant, is worth more than Boeing. Or Sears. Or McDonald's.
Is this a last gasp of the dot-com craziness of the late 1990s, or does eBay's potential truly outweigh all the obstacles -- the fraud, the competition, the legal and technological challenges -- that it is facing?
Some say eBay's $101.92 stock price is justified by its dominance of the online-auction field, a dominance that routinely surprises its investors in a good way.
Last year, the San Jose, Calif., company made $250 million on revenue of $1.2 billion, and it projects that that revenue will grow to $3 billion in 2005. It makes money primarily by taking a small chunk of every transaction between the millions of buyers and sellers who use the site to find bargains or get rid of stuff every month -- from old, inexpensive junk to high-priced goods such as cars and houses. Big companies -- International Business Machines Corp. and Home Depot Inc. -- also use the site to dispose of inventory.
Analyst's comments
"EBay's performance is better than any Internet company I'm aware of, and better than any large-cap company I'm aware of," said Thomas Underwood, an analyst at financial services firm Legg Mason Wood Walker Inc. "It's a very, very good company."
EBay says it has 31 million active, registered buyers and sellers.
Yet several issues hang over the company. Accounts of online-auction fraud are growing. It recently lost (and plans to appeal) a $35 million patent-infringement judgment. And competition on the eBay site itself, as well as from other sites, could lead to problems down the road.
"There are various things lurking in the background," said David Kathman, an analyst at Morningstar Inc., the mutual-fund research company in Chicago.
Online-auction fraud
According to federal authorities, online-auction fraud is the No. 1 Internet-related complaint. Last year, the Federal Trade Commission logged more than 51,000 complaints of online-auction fraud nationwide; analysts say as much as 80 percent to 90 percent of online auctions take place on eBay.
The FTC said many of the complaints were from buyers who did not receive goods after paying for them, or who received goods that were defective or of a lower quality than advertised.
"We have seen a steady flow of [online-auction frauds] even though there have been steps taken in the industry to slow these transactions," said E. Barry Creany, senior deputy attorney general in the consumer division of the Pennsylvania Attorney General's Office.
"At this point, there's still ample room for people who are intent on ripping someone off," Creany said.
To combat rising fraud complaints, eBay has beefed up its security measures over the last year and a half, creating proprietary antifraud software and hiring former White House cybersecurity adviser Howard Schmidt, eBay spokesman Kevin Pursglove said.
Overall, fraud on eBay occurs in less than 0.01 percent of its listings, Pursglove said. Typically, 16 million items are listed for sale daily on eBay.
Kathman, the Morningstar analyst, said incidences of fraud on eBay have been relatively few so far, but one fraudulent act could have a ripple effect.
"If people are suddenly spooked on eBay, some could stop" using the site, Kathman said. "The whole issue of trust is something they need to maintain in this business model. If the trust isn't there, growth could dry up."
Technology issues
In May, a Virginia federal court jury ordered eBay to pay $35 million in patent-infringement damages to MercExchange L.L.C., a Great Falls, Va., company that owns patents on various auction technologies. Specifically, the jury found that eBay infringed on MercExchange's patent for fixed-price-auction technology. Thomas Woolston, who founded MercExchange, began applying for the patents in 1995.
EBay plans to appeal, but a judge could still triple the amount eBay must pay, or order eBay to make changes to its technology.
If eBay is forced to alter its site, buyers and sellers might flee to competitors.
Scores of mom-and-pop Web sites as well as heavy hitters such as Amazon.com Inc. and Yahoo Inc. conduct online auctions.
EBay does not take its competitors lightly.
"The competition is quite stiff when you think about it," Pursglove, the eBay spokesman, said. "We think about it every day. No one really knows where the next new thing is going to come from ... It's fair to say eBay doesn't know. Nobody saw eBay coming."
More problems?
Another form of competition -- among sellers on eBay's site -- could also cause problems. Some auction watchdogs say sellers outnumber buyers on eBay, making it more and more difficult for sellers to get good prices.
"The number of listings has grown to such an extent that the prices being realized on antiques and collectibles has dropped by a third," said David Steiner, president of AuctionBytes.com, an online newsletter published in Natick, Mass., that teaches consumers how to use eBay.
Rosalinda Baldwin, chief executive officer of the Auction Guild, a Fayette, N.Y., online-auction watchdog group, said fewer items listed on eBay now sell at all.
She estimated that, in 1999, at least 75 percent of items listed sold. Today, about 35 percent to 40 percent of the items are purchased, Baldwin said.
Kathman, the Morningstar analyst, said eBay's rising sales from overseas may counter any stagnancy in U.S. sales -- for a time.
"To keep the top line growing, they would have to keep finding more and more customers," Kathman said. "At some point, you're going to reach a saturation point. It's just a question of when you are going to reach that."