Trade Update Jan 19th 2012: EBAY reported Q4 that was slightly ahead of estimates and gave guidance that was lower than consensus but not as bad as some analysts had feared. Investors seem fairly mixed on the report with the stock only up 2.5%. The Jan Put Fly that I paid .17 for yesterday is basically worthless and at this point there is nothing to do but sit tight and see if we get a reversal in the stock or the market that could offer an opportunity in the next 2 days to salvage some premium out of the Jan 29 Puts that I am long. I will keep a close eye on these with 2 days to expiration and will be sure to update readers if I make a move.
Original Post Jan 18th 2012:
Event: EBAY ($30.00) Reports its Q4 results after the close tonight.
-Options marker is implying a whopping 6% move for earnings vs its last 4 qtr average of about 2.35% and the 8 qtr average of about 4.23%.
Q4 Consensus Expectations and Q1 & 2012 Guidance:
Q4: $3.32b in revs and .57 eps
Q1 :$3.169b in revs and .54 eps
FY 2012: $13,639b in revs (up 18% yoy) and $2.31 eps (up 15% yoy)
Price Action & Technicals:
The stock has spent the better part of the last year trading in a fairly wide 20% range btwn $28 and $34, now trading just below the approximate mid-point around $30.00. While the stock traded in a wide band, the range was not to dissimilar to that of the SPX, up or down 10% in 2011, with an almost 20% peak to trough drawdown.
It’s hard to look at this chart and suggest that it has not held its own in a particularly volatile period in the market.
Sentiment: Wall Street analysts are fairly mixed on the name with 20 Buys, 14 Holds and only 1 Sell with an average 12 month price target of 39.18. Short interest as ticked up a tad but sits at just above 1% of the float.
Implied Volatility: 30 day implied vol is about 38 which is rich to the 30 day realized vol of about 28….this is obviously the reason for the out-sized implied move, but cheap to the 60 day realized vol of about 37.50.
Valuation: EBAY currently trades at about 13.5x next years expected earnings which is obviously only a slight premium to the S&P and a healthy discount to AMZN’s 80x . Too be fair AMZN is expected to grow earning next year by about 60% and sales by more than 30%…….on the expected growth front EBAY isn’t exactly decelerating with earnings expected to grow 15% and sales at about 18%.
WHAT TO EXPECT:
When the company reported Q3 back on Oct 19th, they guided down for Q4 and saw an increase in spending that hurt margins. My sense is that it would be fairly unlikely given some of the retail sales data that we have seen as it relates to Q4 that the company will miss their already lowered guidance, but there is a good chance the company who is expected to give Q1 and full year 2012 guidance will guide down to incorporate currency headwinds and the potential for increased spending (which includes acquisitions) in the mobile payments space where EBAY is staking a good part of their future growth.
MY TAKE: EBAY is by no means an expensive stock and has a solid balance sheet, with long term growth that supports its low teens multiple. The questions that investors need answered will likely have to do with costs associated with continued build out of mobile and fixed price marketplace, declining auction business. But the real driver will be guidance, and some analysts already began to throw out some whispers, for instance, Justin Post of Merrill Lynch in a note to clients Tuesday suggested:
We expect eBay to guide 1Q rev./EPS in-line or below Street at $3.18bn/$0.54 due to usual conservatism and Euro uncertainty (despite hedging). The Euro has depreciated vs. the US$ (from ~$1.38 to $1.27) since Oct. With FX headwinds, we expect a full year EPS guide below Street at $2.31; we are at $2.25 and think $2.20 is possible. To start 2011, eBay guided $1.90-$1.95, below current Street EPS of $2.00. A guide below $2.20 would likely be a negative and around $2.30 could be a positive, given cautious FX and Euro-economy sentiment.
So an inline Q4, and a slight guidance hiccup probably does not crush the stock, but for investors to push the stock back up to the top end of the last year’s trading range it will take a beat and raise which it does not sound possible or would be that prudent even if it was possible given the macro headwinds.
This is not an easy call here, and as evidenced by the implied move, options are not cheap……but with a gun to my head I want to play for a short term move back to the 28.00 level which seems to be serious support.
I want to make a very short term BUT NOT VERY HIGH CONVICTION PLAY that Q4 is inline , but Q1 and 2012 guidance below expectations and the stock heads straight back to support at $28.00
TRADE: EBAY $30.00 Bought the Jan 29/28/27 Put Fly for .17
-Bought 1 Jan 29 Put for .46
-Sold 2 Jan 28 Puts for a total of .38 (.19 each)
-Bought 1 Jan 27 Put for .09
Break-Even on Jan Expiration (Friday):
Profits btwn 28.83 and 28.00 make up to .82 with max gain of .83 at 28.00, profits trail off btwn 28.00 and 27.17.
Losses of .17 btwn 29 and 28.83, losses of .17 btwn 27.17 and 27 with max loss of .17 above 29 and below 27.00
TRADE RATIONALE: this is obviously not a high conviction trade, but I am isolating a technical point where I think the stock could go if they disappoint on guidance. I chose the Butterfly even though the commissions can be high because I like the risk reward that if right on direction, and the options market is right on the magnitude of the move then this structure risks .17 to make .83 in 2 trading days. There are a lot of things that I need to get right here, but there is a good chance that if I get direction right, but magnitude wrong I can salvage some premium by exiting the Jan 29 puts.