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eBay sees declines in profit and operating margin in Q3

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Online auction giant eBay (NASDAQ: EBAY), a business that counts Amazon (NASDAQ: AMZN) and Yahoo! (NASDAQ: YHOO) as related companies, was not popular in Wednesday's after-hours session. The third-quarter report just didn't do it for Wall Street, so Wall Street decided to make some trouble and bring the per-share price of the stock down by 4.5%. Oh sure, the company beat earnings by the most famous amount there is -- the proverbial penny -- but, according to this Bloomberg piece, guidance was not so inspiring.

The top line was actually pretty cool. Net sales saw an increase of 6%. Unfortunately, the bottom line couldn't take advantage of such growth. On an adjusted basis, net income dropped 16% to 38 cents per diluted share. And, as I just said, that was one penny ahead of the analysts.

Big deal, though, because I'm sure investors weren't too happy with the operating margin. The adjusted metric went from 31.8% to 28.4% in Q3. Several factors were cited in the press release as to why this happened, and let me say, it's never comforting to hear that a business you're invested in is shifting to "faster growing, lower margin businesses." Yes, I do get what management wants to do. It's sacrificing a little here and a little there for future earnings expansion, but again, high-margin ventures are more popular.

We should not overlook the statement of cash flows, which wasn't bad at all. Money derived from operating activities increased over the nine-month period. Free cash flow held up well, too. You therefore have to give management some credit for this part of the release. Without a doubt, generation of the green stuff is important.

I don't think the after-hours sell-off or the guidance is going to sink eBay's short-term prospects. We'll have to see where the stock closes at today, but any pullbacks could possibly be bought for a trade, considering that shares have made it to the 52-week-high club.

However, eBay is not, to me at least, a candidate for a long-term portfolio. There are issues with Skype, as this article from Daily Finance mentions, as well as simple concern for the holiday season. Retail investors who don't trade a lot would probably be better off considering avoiding eBay for now.

Disclosure: I don't own any company mentioned; positions can change without notice.

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Last updated: November 25, 2009: 07:45 AM

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