New Trade $EBAY: eBAIT

by Dan January 14, 2014 3:09 pm • Commentary

On a few occasions last year we took a shot on the long side on EBAY (here). The stock remained range-bound for most of the year between $50 and $58. There was money to be made for traders who bought at $50 and sold in the mid to high $50s, but buy and hold investors in the stock were left with no return relative to a market that was up 30% plus.

Last year the company grew earnings & sales (assuming Q4 is inline) at 14% year over year. Not bad, but bears would argue that the growth is decelerating.  That being said, analysts expect 15% growth this year, higher than last.  What astounds me is that I am hard-pressed to find another $60 billion plus market cap company in the tech space that trades on a PE basis at ONE times that growth.

In late November I wrote that a piece titled “EBAY Looking More & More Like Activist Investor Bait” because it struck me that a company like EBAY with their strong cash generation, rock solid balance sheet could become the target of an activist who would push for larger share buybacks and the introduction of a dividend.  Your guess is as good as mine on this front, but back in Nov when there was some unusual call activity in the name, it was also met with some rumors of possible interest of Carl Icahn.  The company and the stock checks a lot of boxes for activists, but not being one I am generally unfamiliar with their process, so i’ll just stick to the options stuff.

Upcoming Event:

The company reports Q4 earnings on Jan 22nd and the options market is implying a one day move of about 5%, which is basically in line with the 4 qtr avg of about 4.75%.  I will mention that the last 3 qtrs the stock has sold off on avg of about 5.5% following results.

Analysts remain overwhelmingly bullish on the stock with 35 Buy ratings, 10 Holds and no sells with an average 12 month price target of $62.40 or about 19% higher than current levels.  Last week Morgan Stanley downgraded the stock suggesting:

“While management deserves accolades for the business turnaround and is positioning eBay as a key player in omni-channel long term, we see risk to 2014/2015 estimates. Without positive catalysts that will allow investors to incorporate eBay’s omni-channel/offline initiatives into their numbers, we believe the current risk-reward profile is balanced.”

So while the Street remains generally bullish, investors are bracing for a downward revision to future earnings.  I have no clue what they guide to, and if the quarter is inline and guidance is inline I suspect investors will remain skeptical.  I want to be bullish, but I want to look to do so with defined risk and look to finance this view that could take some time to play out.

TRADE: EBAY ($52.93) Bought Jan 24th (next week) / April 55 Call Spread for 1.35

-Sold to open 1 Jan 24th 55 call at .82

-Bought to open 1 April 55 call for 2.17

Break-Even on Jan 24th Expiration:

-Profits are maximized at 55 on Jan 24th expiration. Slight moves above and below that strike are also profitable with big moves higher or lower putting the structure at risk of losses on expiration.

-Max risk is $1.35

Trade Rationale:  I am not really looking for a beat and raise quarter, so I am not anticipating a massive move higher, but I want to take advantage of the elevated implied volatility in next week options for earnings to help finance the purchase of longer dated calls.