$EBAY Q2 Earnings Preview

by Enis July 16, 2014 10:09 am • Commentary

Event:  EBAY reports its Q2 earnings today after the close.  The options market is implying about a 4.5% one day move, which is just about in line with both the 4 qtr avg of about 4.25% and the 8 qtr avg of about 4.75%.

Sentiment:  Wall Street analysts have remained quite bullish on EBAY even as the stock has badly lagged the market over the past 18 months, essentially flat while the market is up around 40%.  Analysts have 29 buys, 16 holds, and No sells on EBAY, with a 12 month average price target of around $61.  Short interest is low at 1.9% of the float, and EBAY is down 7% so far in 2014.

Options Open Interest:  Calls vastly outnumber puts in total open interest, by a ratio of around 1.75 to 1.  The one month average volume has been similar, at around 1.85 to 1 in favor of calls over puts.  The bulk of the open interest in this week’s expiration, with the Jul19th 62.50 and 65 calls likely to expire worthless, with each line at over 60k of open interest (those trades were put on ahead of Icahn’s stake announcement last year).  Among strikes in play, the Jul19th 52.5 calls have nearly 70k of open interest, the most of near-term maturities.  The Jul19th 50 puts have over 45k of open interest.  Among longer-dated maturities, the Jan15 52.5 calls have over 30k of open interest.  

Price Action / Technicals:  EBAY finally broke out of its $48-$58 range in the 1st quarter, but that breakout quickly failed.  The false breakout led to a steady bout of selling that took the stock all the way back down to the lower end of the range:

[caption id="attachment_42959" align="alignnone" width="600"]EBAY weekly chart, Courtesy of Bloomberg EBAY weekly chart, Courtesy of Bloomberg[/caption]

EBAY still looks rangebound technically after bouncing near $48 support in late June.  The $53 level, which is near the 50 week moving average, is the first resistance spot to watch on the upside.  On the downside, $48 support is critical, and a break below there that holds would indicate a longer-term top for EBAY.

Fundamentals/Valuation:  EBAY has been left behind over the past 18 months.  Even Carl Icahn’s stake announcement in early 2014 has not been enough to get this stock moving higher.

We currently have a bullish trade on in EBAY, and Dan laid out the bull case in that post in early June:

Given that pressure, management might finally be looking at ways to get shareholders excited about the company again, such as a large buyback program, strategic action, or even possibly agreeing to Carl’s long proposed PayPay spinoff.  While EBAY management re-patriated cash last quarter, leading to acquisition speculation, management is likely quite concerned about a dilutive cash outlay when sentiment surrounding the company is so poor.

In short, management might get shareholder friendly, and fast.  With stock depressed, sentiment poor, and management under the gun, we like playing for upside

Amidst all the pessimism, EBAY is still likely attracting value investors who are intrigued by PayPal’s growth against the relatively cheap valuation (17x P/E) for EBAY as a whole (with 10-15% EPS growth expected).

The shares traded the highest volume in a few weeks on Friday after stronger-than-expected monthly sales figures.  If management does unveil some shareholder-friendly measures and decent results this afternoon, the stock could see another bout of buying tomorrow.

Volatility:  30 day implied volatility, as is the case with most stocks in the current market, is below its pre-earnings average over the past 2 years:

[caption id="attachment_42958" align="alignnone" width="600"]30 day implied volatility in EBAY, Courtesy of Bloomberg 30 day implied volatility in EBAY, Courtesy of Bloomberg[/caption]

Implied volatility caught a bid when EBAY broke $50 support in early June, but the stock has gradually grinded higher since then, and options demand has waned as a result.  30 day implied volatility likely falls back to around 20 after the earnings event.

Our View:  We are relatively positive on EBAY shares, despite the security and business issues the company has faced in the past 6 months.  The risk/reward seems skewed to the upside all things considered, though management is the wild card, as it has been asleep at the wheel while issues persisted.  If management delivers for shareholders this quarter, we expect further upside.