$EBAY Q4 Earnings Preview

by Enis January 22, 2014 10:01 am • Commentary

Event:  EBAY reports its Q4 earnings today after the close.  The options market is implying about a 6.25% one day move, which is above the 4 qtr avg of about 4.75% but below the 8 qtr avg of about 6.5%.

Sentiment:  Wall Street analysts have remained quite bullish on EBAY even as the stock has badly lagged the market over the past year, essentially flat while the market is up 25%.  Analysts have 35 buys, 11 holds, and No sells on EBAY, with a 12 month average price target of around $63.  Short interest is relatively subdued at 1.7% of the float.

Options Open Interest:  Calls vastly outnumber puts in total open interest, by a ratio of 1.9 to 1 (500k calls vs. 275k puts).  The one month average volume has been even higher, at around 2.5 to 1 in favor of calls over puts.  Dan mentioned yesterday’s call activity in the TMO post:

EBAY- reports Q4 earnings tomorrow after the close, the options market is implying about a 5.5% one day move which is essentially inline with the 4q avg move.   A trader sold 5800 Feb 52.50 calls to close at 2.78 and bought 11,500 Feb 55 calls to open for 1.56

The Feb22nd 52.5 calls have over 50k of open interest, matched only by the Jul 62.5 and 65 calls, which both have over 50k of open interest as well.  On the put side, the Feb22nd 50 puts have the most open interest, at almost 17k outstanding.

Price Action / Technicals:  EBAY has been in a $10 range for the entirety of the past year.  The stock was actually in a strong uptrend from its August 2011 low until February 2013, more than doubling in that period on a series of strong earnings reports in 2012.  However, the stock has been stagnant in the past year:

EBAY weekly chart, Courtesy of Bloomberg
EBAY weekly chart, Courtesy of Bloomberg

The $50 level (green) has acted as support for most of that period, though the stock briefly dipped under 50 in November, making a low of $48.06.  Its 1 year high was made at $58.04 in April 2013.

Importantly, EBAY in the past year, despite several pushes to around $58, has not been able to break its all-time high of $59.21 set in December 2004:

EBAY monthly chart, Courtesy of Bloomberg
EBAY monthly chart, Courtesy of Bloomberg

The monthly chart shows how messy the price action has been over the past year.  $58-$59 is big resistance, while $48-$50 is crucial support, and not much resolution to the charts anywhere between those areas.

Fundamentals/Valuation:  Here is what Dan said about EBAY’s fundamentals in his New Trade post last week:

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.

Some investors have expressed concerns in the last couple months after EBAY management lowered their expectations for the holiday sales season.  But the stock has weathered those concerns quite well, possibly a sign that buyers view the negative news as priced in to the stock given the valuation.  If EBAY does match analyst estimates for earnings growth this year (no small task), then the stock is likely headed higher.

Volatility:  Implied volatility in EBAY is lower than it has been prior to earnings over the past year:

30 day implied volatility in EBAY, Courtesy of LiveVolPro
30 day implied volatility in EBAY, Courtesy of LiveVolPro

A big reason for those lowered volatility expectations is the subdued realized volatility in EBAY over the past year, maintaining that tight range for the stock, with short bouts of volatility on earnings.  The 4th quarter is the biggest contributor to EBAY earnings each year (about 30%, vs. closer to 23% for the other 3 quarters), but options traders (ourselves included) do not anticipate a big move given the ample holiday sales data in the past month.

Our View:  We are of the mindset that the actual earnings event could be a bit lackluster given channel checks in the past two months, but the market’s expectations for EBAY stock are already quite low based on the stock’s flat performance over the past year.  Dan laid out the trade idea on EBAY last week, and we continue to hold that position into the event.