MorningWord 12/16/13: $EBAY – Barron’s Baby

by Dan December 16, 2013 9:26 am • Commentary

MorningWord 12/16/13:  On more than a couple occasions in 2013, we have attempted to crack the code of EBAY’s embarrassing performance  in a raging bull market.  In the last couple months we have used the $50 technical support level as our lower level stop with the use of in the money call butterflies (here and here).

The stock has been a dog, despite possessing all of the attributes of an investment that should be working at this stage of a bull market. Despite having decent success from the long side, I threw in the towel on one last long biased structure when it broke support. But I still felt that there was hope when wrote a post on Nov 26th titled  “EBAY Looking More & More Like Activist Investor Bait” That was quickly followed by:

“a trader buying 50,000 July 62.50/65 Call Spreads paying .275, that trade breaks-even at $62.775 on July expiration, up 28% from current levels, which would also be about 6% above the all time highs made in 2005”

November saw some heaving trading in calls relative to puts helped by the occasional rumor that Carl Icahn might have taken a stake.  This activity has continued into December as total open interest sits at about 967k, with 635k calls and 331 puts and the 20 day average for EBAY options has been 41k calls to 17k puts.  The four largest lines of open interest are all calls with 87k Jan14 55 calls, 60k July 62.5 calls, 51k July 65 calls and 42k Jan14 52.50 calls.

The stock got a very positive mention this weekend in Barron’s, “How PayPal Could Drive eBay Higher“.  The author includes a great quote from a long term shareholder who has recently been adding to his position at current levels:

“The speculators and momentum players would rather look for companies with 100% top-line growth and no bottom line, and dream about future monetization,” says Martin Sass, the founder of M.D. Sass, a Manhattan investment firm that manages $6 billion. “Ebay is very visible and maybe boring, but it delivers.”

The article goes on to highlight the fairly well known and long standing bull case for the shares related to their e-commerce & auction positioning, but the crux of the story is about their mobile payments gem, Paypal:

Ebay owns PayPal, an online-payment service that has become a key growth contributor. Its profits should expand at a compounded rate of 17% per year through 2015, versus 10% for marketplace profits, predicts Susquehanna Financial Group. That would raise PayPal’s profit contribution to 35% by 2015 from 31% in 2012. Much of PayPal’s past growth has come from its increased use online, at and other e-commerce sites. Now, the company is taking on offline-payment networks, like Visa (V) and MasterCard (MA), by striking deals with retailers that allow shoppers to pay with PayPal accounts using their mobile phones.

We just don’t get it, this is not an upstart selling beanie babies to hobbyists anymore. This is an e-commerce behemoth with $16 billion in annual sales, THAT HOLDS NO INVENTORY. They just take cut of the sales either through brokering the transaction or providing the payment platform.  The company is expected to grow earnings at 16% a year for the next two years and sales at 15% for that time period and only trades at 16 and 14x that expected earnings growth respectively, with gross margins of 69%!

To put this is some context, GOOG (albeit a much larger company) is expected to grow earnings 19% and 17% a year for the next two years, sales at 18% and 16% a year, gross margins at about 69%, but the stock is up 50% year to date, basically at all time highs, while EBAY’s shares are basically flat on the year.

It makes no sense to us. With the right entry, this is a stock that we are looking at for our Investment portfolio as sort of a “Dogs of the Dow” play in the New Year. Stay Tuned.