$EBAY Q2 Earnings Preview

by Dan July 15, 2013 11:15 am • Commentary

Event:  EBAY will report their Q2 earnings on Wednesday after the close.  The Options Market is implying about a 4.75% move vs the 4 qtr avg move of about 5.5%.

Sentiment:  It is hard to find a large cap tech stock that is more universally loved by Wall Street analysts than EBAY, which commands 39 Buy recommendations, only 6 Holds and not a single Sell.  The average 12 month price target is ~$64, and short interest sits at a measly 1.3% of the float.

Price Action: Interestingly though, the stock was down on the year in the last week of June, and since the June 24th low in the SPX, the stock has gained almost 12.5% placing it up ~10.5% on the year, still massively under-performing the SPX and the Nasdaq year-to-date.  

Technicals:  The stock has traded in a fairly wide range of about 17% from its lows in Q1 to its highs in mid April prior to its Q1 report.  In June, the stock made a series of closes below its 200 day moving average for the first time in almost 18 months.   The one year chart below shows the series of lower highs since the April highs, while the stock has also been able to hold intermediate term support at $50:

[caption id="attachment_28091" align="alignnone" width="628"]1 year daily chart of EBAY, Courtesy of Bloomberg 1 year daily chart of EBAY, Courtesy of Bloomberg[/caption]

The stock is range-bound to say the least.

Fundamentals:  EBAY earned $2.36 per share in 2012, is expected to earn about $2.75 in calendar year 2013, and $3.25 in calendar year 2014.  So this is a company with 15-20% earnings growth priced at about 24x trailing 12 month earnings.  Reasonably priced in that respect.

The key for EBAY’s growth has been the Payments business (20%+ growth) led by PayPal, while its Marketplace and GSI businesses are the older, slower-growing segments.  In the last quarter, the payments business was actually a bit of a disappointment, and the stock fell almost 6% following the report.

Vol SnapShot: Implied volatility (red line)heading into the event is the lowest it has been in the past year for earnings:

[caption id="attachment_28092" align="alignnone" width="683"]1 year chart of EBAY 30 day implied volatility (red) vs. 30 day realized volatility (blue), Courtesy of LiveVolPro 1 year chart of EBAY 30 day implied volatility (red) vs. 30 day realized volatility (blue), Courtesy of LiveVolPro[/caption]

Part of that is due to the low level of realized volatility, but it is also likely due to the fact that the last 3 earnings reports in EBAY have not resulted in a move greater than 6% in either direction.  Expect 30 day implied vol to fall to around 20 after the report.

Options Open Interest:  Total open interest is pretty well skewed towards calls with 224k to 164k puts, with the largest open lines: 18k of the July 55 calls, 18k of the Oct 55 calls, 16k of the Oct 62.5 calls, 13k of the July 57.50 calls, 13k of the Aug 50 puts, 12k of the July 55 puts, and 10k of the Aug 55 puts.

My View: When EBAY reported their Q1 results back in April, the quarter was marked by a surprise in lightly less than expected PayPal revenues, and better than expected Marketplace performance.  This is not a trend that EBAY bulls will want to see a continuation of in Q2 or for the back half of 2013.  On the call, EBAY management guided Q2 results below street consensus, and to a run rate that would suggest that if they are too hit the full year guidance the company put out in Jan, than they will need to see a meaningful re-acceleration in second half sales.

So for the stock to breakout, we will likely need to see a beat of already lowered Q2 and a raise of at least Q3 which would suggest that the full year guidance is achievable.  Expectations are low for Q2, consensus sees earnings growing at 13% yoy, a quarter that saw growth of 17% last year and 20% in 2011.  Sales are expected to grow 15% in the quarter (yoy) below the 23% in 2012 and 25% in 2011.  SO it really comes down to forward guidance, and as one of the first E-commerce plays to report results, your guess is as good as mine, especially given the weird mix last qtr of poor PayPal and better than expected Marketplace.

We are going to take a closer look at trades given EBAY’s 14% rally from late June some of the near term good news could be in the stock, and a beat and guide down for Q3 and/or the full second half of year could see much of the recent gains wiped out, with $50 serving as serious support.  Another point to remember, the investor base in EBAY has shown itself to be a tad more skeptical (despite valuation)  than that of say AMZN, otherwise, EBAY would very likely be making new all time highs with no news. So I suggest it would take a fairly material beat and raise for the stock to break the April highs and make a run of the 2004 highs near $60.