EVENT: EBAY will report their Q1 results tonight, and the options market is implying about a 4.75% one day move vs the 4 qtr avg of about 4.3%.
There was a large trade in the options market that is worth noting (it went up shortly after the open). A trader paid 1.40 for 25,000 April 24th weekly 56.50 calls and sold 1.122 million shares at $56.55. I suspect this trade was stock replacement as the implied move seems kind of cheap. I am also surprised a market maker would sell the move hours before the earnings event.
My View: Much like our conversation about Yahoo yesterday (here), investors in EBAY seem to be a tad more focused on the catalyst front on the timing of a tax free spin off of assets (Paypal) opposed to the fixing of their respective stagnant core businesses. Both Web 1.0 stocks got pushed around by activists and very soon (post spins) both company’s will see their CEOs under fire to re-invigorate growth in their core businesses. Which is one reason I find the options trade detailed above odd as I don’t see a ton of downside risk purely on their results. I suspect investors are willing to give them a pass in the near term. I guess if there was a hiccup with the Paypal spin, that could send the shares to the low $50s, but I have to assume that is a low probability event.
PayPal: What strikes me is that Paypal revenue are expected to grow 15% year over year, making up about 40% of EBAY’s total sales in Q1. While 15% is nothing to shake a stick at, when you back out Paypal from EBAY’s total expected sales growth of 6% in 2015, you are left with a business that is likely to be on the wrong side of secular trends in eCommerce. There was a time when Carl Icahn was in EBAY’s face, ePayments was a hot topic, and EBAY looked cheap, but the stock trading at 18x expected eps growth in 2015 of 5% looks a lot less so.
Competition: Oh, and more on PayPal. They better get their act together on mobile and in app, because Apple, Amazon, Google and Facebook are coming in a very big way. Which leads me to my main thesis on EBAY / Paypal. Once the spin is done I can’t imagine PayPal is independent for too long, and if I were Google or Facebook I might strongly consider buying Paypal to meet the Apple Pay threat head on. So in the meantime, despite weak trends in EBAY’s core, and little color on when the Paypal spin is going to happen, EBAY could be a decent own. Get PayPal, and then sell EBAY stub and likely short it against long Paypal.
So what to do?
I like the idea of selling calls at the implied move in weekly options and finance the purchase of longer dated calls that would benefit from any news on the Paypal spin date. The stock as an outright long is kind of un-compelling to me, and playing for a breakdown after the stock’s 10% decline from the multi-year highs feels like a press:
TRADE – Buy the EBAY ($56.75) May/July 60 call calendar for .83
– Sell 1 May 60 call at .53
– Buy 1 July 60 call for 1.36
Rationale – This trade positions for a move higher between now and May expiration with the potential for owning the breakout above 60 after May expiration. Ideally the stock is higher on earnings but not through 60. Following May expiration the July calls can be rolled as a calendar by selling June or turned into a vertical by selling a higher call in July. This decision rests largely on where the stock is. At initiation the trade is +10 deltas and sells vol at 29 in May in order to finance buying 23 vol in July.