MorningWord 10/17/13: Tough Day in $EBAY

by Dan October 17, 2013 9:30 am • Commentary

In what has become a disappointing trend for eBay investors, the company once again lowered guidance for the following quarter on this quarter’s results.  EBAY beat earnings by a penny and barely missed revenues, but the stock is down 5% in the pre-market because of its reduced guidance for Q4.

PayPal continues to be the bright spot in what management characterized as a “lackluster macro environment” overall.  Revenue increased 19% and users grew 17% year-over-year, with net total payment volume growing 25%.  More concerning was management’s view on the 4th quarter.  On the call, CFO Bob Swan said that he doesn’t expect U.S. E-commerce rates to improve in the pivotal 4th quarter.  The company is already worried about the pace of E-commerce sales so far heading into the holiday season.

In the pre-market the stock is back down near the $50 level (currently trading $50.15).  The stock has bounced from the $49-50 area on 4 occasions in the past 10 months:

EBAY daily, 200 day ma in black, Courtesy of Bloomberg
EBAY daily, 200 day ma in black, Courtesy of Bloomberg

As we highlighted in the Morning Word on Monday, market participants want high growth at any price in the current environment.  So even if EBAY offers decent growth at a reasonable price, investors are not willing to give it the benefit of the doubt like they are with other internet companies.

Having said that, we’re on the lookout for how the stock reacts around the crucial $50 level.  If it shows signs of holding, we might take a shot on the long side, since valuation is still reasonable for a company growing sales and earnings at a 15% clip per year.



MorningWord 10/14/13: $EBAY – Great opportunity to buy growth at a reasonable price?

EBAY will report their Q3 earnings Wednesday after the close.  The options market is implying about a 5% move following the results, which is essentially inline with the 4 qtr avg move and shy of the 8 qtr avg move of about 6.4%.  IN a year that has witnessed a resurgence in a speculative appetite for Net stocks, EBAY’s 6.6% ytd gains seem fairly disappointing when you consider the stock trades at 17x next year’s earnings that analysts expect to grow 18%, and 14.5x 2015 earnings expected to grow at 17%.

To put EBAY’s under-performance in some context, it’s not just against all those new-fangled social media stocks, but also vs the Web 1.o stocks like AMZN & GOOG up 23% ytd, PCLN & YHOO up 62% and 71% respectively.

I spent most of this year scratching my head as to EBAY’s lack of participation.  FB’s nearly 120% gains since the 2013 lows, gaining nearly as much in market cap as all of EBAY, probably has a lot to due with it.  The money has just been going to other places, and while EBAY appears to be very cheap on a PE to Growth metric (trading at 17x next years expected earnings growth rate of 18%), it appears that tech investors would rather pay up for growth rates that are likely unsustainable.

While this may look a tad enticing, Sanford Bernstein analyst Carlos Kirjner (who rates the shares a buy with a $66 12 month price target) suggests in a quarterly preview dated Oct 10th that:

3Q13 will be important for eBay. Either the results and guidance will confirm the company’s ability to deliver on is guidance with a meaningful acceleration in 2H13, which should carry into 2014, or we may see the company lower annual guidance, or maintain it but just squeeze by on EPS by cutting  investment, which will call into question the long term sustainability of its growth.

Investors have an insatiable appetite for growth, and FB is likely to continue to work as long as they are able to put up eye-popping mobile ad growth (which will most definitely decelerate meaningfully in the next couple quarters – watch out below when that happens), but EBAY’s slow and steady Marketplace and PayPal just don’t have the Sex appeal at the moment.

If EBAY’s Q3 comes off without a hitch, and the forward guidance remains intact then it may end up being one of the great opportunities to buy growth at a reasonable price in this entire market.  We will take a closer look as we get nearer their print Wednesday evening.