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Summary

  • Over the past four quarters, the company has seen its income grow by an average of 13% year-over-year, including a 26% increase in the January quarter.
  • eBay's revenue has risen by an average of 16% year-over-year over the past four quarters. Management surprised the Street with its biggest jump of 21% in January.
  • With the stock still down 2% on the year to Friday's close of $53.72, the current share price seems attractive on the basis on analysts' high price target of $75.

With worse-than-expected results coming out from Amazon (NASDAQ:AMZN), which sent the online retailer's stock tumbling down 10%, eBay (NASDAQ:EBAY) investors are -- understandably -- nervous for what this may mean for the auctioneer's results. Although eBay stock has done relatively better, down just 2% year-to-date, eBay stock has lost more than 9% since reaching its 2014 high of $59.30. But it's not hard to figure out why.

Although eBay is still posting strong growth numbers, both from its Marketplace and from the PayPal division, activist investor Carl Icahn, who owns 2% of eBay's stock, has rattled eBay's boardroom by demanding the company to spin off the PayPal business into a separate entity. Icahn believes this will create more value for both eBay and PayPal. But Icahn has also made things personal.

Aside from demanding that eBay spins off PayPal, Icahn recently claimed that board members Scott Cook and Marc Andreessen have not acted in the best interest of shareholders, to put it mildly. He has described their actions as "lapses in corporate governance." In a letter to shareholders, Icahn said:

"We have found ourselves in many troubling situations over the years, but the complete disregard for accountability at eBay is the most blatant we have ever seen."

Icahn was referencing Scott Cook for his investments in companies that compete with PayPal and eBay. When it came to Andreessen, Icahn claims that shareholders lost out on roughly $4 billion in profit when he sold Skype to Microsoft (NASDAQ:MSFT) three years ago in a $8.5 billion deal.

All told, eBay has largely under-participated in the strong rally in equities this year, and investors are getting restless. On Tuesday, the company will report its first-quarter results, and you can bet that management will be pressed about details regarding the proposed spin-off and any new developments related to PayPal and ways eBay can leverage PayPal's popularity to further its growth in the realm of mobile.

On Tuesday, analysts will be looking for earnings per share of 67 cents. Although that estimate has remained unchanged over the past 30 days, it is up by one penny since eBay reported its fourth-quarter results. The 67 cents represents a 6% increase in profits year-over-year. Last year, eBay posted earnings per share of 63 cents. For the full fiscal year, analysts are projected a profit of $2.99 per share, 10% better than a year ago.

But investors have reason to be optimistic. Consider that over the past four quarters, the company has seen its income grow by an average of 13% year-over-year, including a 26% increase in the January quarter.

In terms of revenue, the Street is projecting $4.23 billion for the quarter, which represents a 13% jump year-over-year. Last year, eBay posted revenue of $3.75 billion. For the year, revenue is projected to roll in at $18.26 billion, which will top last year's mark by roughly 14%. As with the strong trend in earnings, over the past four quarters, revenue has risen by an average of 16% year-over-year. Management surprised the Street with its biggest jump of 21% in January.

So the fact that eBay has not participated in the strong stock rally is puzzling. From my vantage point, more important than PayPal, eBay's future will hinge on the company's ability to grow its mobile payments business. That's the only way for eBay to prove that it is more than just an online marketplace, which will remove concerns about Amazon's decline.

With increased pressure from existing mobile payment platforms like Google's (GOOG, GOOGL) new Gmail Wallet and traditional credit card processors like Visa (NYSE:V) and MasterCard (NYSE:MA), eBay management must show that PayPal, which already has more than 130 million active users, can still be a dominant player, especially with rumors of Apple (NASDAQ:AAPL) now entering the mix.

On Tuesday, management must convince analysts and Carl Icahn that they have a suitable plan. And I expect that they will. With the stock still down 2% on the year to Friday's close of $53.72, the current share price seems attractive on the basis on analysts' high price target of $75. Note, the median analysts' price target is $64. And I think this level offers a nice entry for long-term investors, and is a sure bet to reach $60 by the second half of the year.

Source: Why eBay Is Heading To $60