Economy Weighs On eBay, Google

BURLINGAME, CALIF. -

Analysts are primed to hear about the economy this week, as Silicon Valley giants eBay and Google report their third-quarter earnings on Wednesday and Thursday.

Both companies rely on consumer spending to support their revenues. San Jose, Calif.-based eBay (nasdaq: EBAY - news - people ) has direct contact with consumers, brokering merchandise transactions between buyers and sellers on its site. Mountain View, Calif.-based Google (nasdaq: GOOG - news - people ) generates nearly all its revenues from consumers clicking on the ads on its sites and partner sites. The more consumers spend, the more they click on ads and the more money Google makes from advertisers.

But the weak economy has dampened spending, and industry experts are predicting the worst holiday shopping season in recent history.

EBay's earnings shouldn't surprise anyone. The online retail giant said on Oct. 8 that it expects third-quarter earnings to exceed its estimates of 39 cents to 41 cents per share. Analysts polled by Thomson Reuters expect earnings of 41 cents per share on revenues of $2.1 billion.

The company has been struggling the past two years as traffic to the site has declined 11% due to competition from Amazon.com (nasdaq: AMZN - news - people ), Google and others, and the volume of sales that flow through eBay's site has stalled. The troubles led to the departure earlier this year of longtime Chief Executive Meg Whitman and the Oct. 8 announcement of 1,000 job cuts, or 10% of its workforce.

Under new Chief Executive John Donahoe, eBay has lowered some seller fees, but Jefferies & Co. analyst Youssef Squali said the changes likely won't offset the effects of the sluggish economy (see "The Real Reason Why eBay Is Stuck").

"While recent initiatives appear to have improved selection, we believe that macro weakness will continue to crimp consumer demand, leading to lower conversion rate and lower average selling price," Squali wrote in research note.

American Technology Research analyst Tim Boyd said in a research note that investors will be focused on eBay's fourth-quarter and full-year guidance. Boyd expects revenues to decrease due to weak consumer spending and the strengthening dollar. "We expect a new FY08 revenue midpoint of $8.8 billion, which is the low end of the existing guidance range," Boyd wrote.

The strong dollar is also expected to work against Google in the third and fourth quarters. American Technology Research analyst Rob Sanderson estimates that the currency situation will be a $110 million drag on revenues in the third quarter and a $260 million drag in the fourth quarter.

Analysts expect Google to report third-quarter earnings of $4.80 on revenues of $4 billion.

The days of Google's blockbuster advertising business being shielded from the economic winds of change are probably coming to an end. "After starting the year with Google in both January and April stating that it wasn't feeling any macro effects, the picture has clearly changed. The question is, To what degree?" Barclays Capital analyst Douglas Anmuth wrote in a research note.

Google is also famous for not providing financial guidance, but Anmuth said this could change as well. "We think investors need more clarity during this less certain period," he wrote.

In addition to the economy, Anmuth said, Google is becoming a mature company and sees a slowdown in growth. "Google's growth over the last few years has been helped by toolbar distribution deals, affiliate partnerships and new advertiser dollars moving over to search, especially from traditional retailers," he wrote. "With fewer partnerships and overall query growth moderating, Google is seeing a more natural slowdown in its business."