Mathew Ingram: Online auction giant feeling the chilly winds

Trade Me may have foiled its ambitions in New Zealand, but online auction site eBay has become one of the heavyweights of the internet, right up there with Amazon, Yahoo and Google.

But after a decade of growing at high double-and triple-digit rates as it expanded rapidly into new services and new countries, eBay's growth has been slowing, and some investors are concerned the party might soon be coming to an end.

The company's share price, which has dropped by more than 40 per cent over the past six months, took another slide last week after a leading brokerage firm cut its rating on the stock to "underperform".

Safa Rashtchy, of Piper Jaffray, also dropped his target price to $25 from $30.

He said recent trends at the online auction company suggest "a worsening picture for eBay".

The analyst said he was concerned that buyers were not coming to the auction site the way they once did.

This meant eBay might have to boost its advertising and marketing costs, which would cut into its profit.

The company has tried several strategies in an attempt to stimulate growth in its core auction listings, where growth has been slowing the fastest, but analysts are sceptical about their chances of success.

Growth continues to be relatively strong for eBay stores - professional or semi-professional sellers who set up their own virtual storefronts - but the company doesn't get as much money from them as it does from regular listings.

In any case, Rashtchy says, it's not sellers who are the real growth problem but a lack of buyers.

For some observers, a sign of eBay's desire to boost its growth was the purchase of Skype, the free - and unprofitable - internet phone network it this year agreed to buy for between US$2.4 billion and US$4.1 billion, depending on the company's financial performance.

Although eBay has been integrating Skype's voice-over-internet calling into some of its services, there has been little sign that it will get enough benefit from Skype to justify the purchase price.

This has increased concerns about the company's financial future.

To make matters worse, a recent report from one brokerage firm said Skype's growth also seemed to be slowing.

RBC Capital Markets analyst Jordan Rohan said increases in two main measures of growth at the voice-over-internet company - number of downloads and number of new users - had slowed since eBay bought the company.

"Our recent checks indicate ... that the user growth is no longer accelerating," he said.

To stimulate growth, eBay might have to spend money on marketing or offer price promotions.

"If eBay chooses to do both, margins would fall short of our revised forecast," Rohan said.

As well as auctions and storefronts set up by power sellers, one of the factors in eBay's growth has been its online payment service, PayPal.

Unfortunately for eBay, concerns about that have been increasing since search giant Google started its own payment scheme, Google Checkout. Although it was introduced only recently and has yet to catch on with many users, some analysts believe Google's service will be more attractive to online sellers than PayPal, which would take even more steam out of eBay's growth.

It's not as though eBay is about to go under.

In the quarter to June, the company's core listings turned in growth of 26 per cent - beating the previous quarter's 22 per cent - and after excluding the cost of expensing stock options, profit was in line with analysts' expectations.

Growth also continued to be healthy in the United States and several foreign markets, including Britain and Germany, although it slowed in Canada, France, Australia, China and some others.

But there are enough worrisome trends at eBay to have analysts and investors concerned about its ability to keep its growth rate stable, let alone increase it.

One of its core growth activities is slowing, fears of competitive pressures affecting a second are rising, and question marks are being raised about a third ... there isn't much left for the market to get excited about.