EBAY – Partying Like it’s 1999

by riskreversal October 5, 2016 1:29 pm • Trade Ideas

Last night on CNBC’s Fast Money we discussed Facebook’s launch of their Marketplace feature, think internal Ebay:

As Julia Boorstin reported, the Marketplace had a gaff at launch by not having a filter set for indecent items for sale, (which was fixed), but also that they “lack a secure payment system, star ratings and does not facilitate deliveries”.  All of the above are issues that can and will be quickly remedied, and I suspect it won’t be too long before the company has achieved a certain level of success. On the payments side I think it is important to note that in 2014 Facebook hired David Marcus, who at the time was CEO of PayPal (PYPL) who has a little experience with secure payments and digital marketplaces. Lets not forget that EBAY is expected to book about $9 billion in sales in 2016, most of it listing fees, with about $2.2 billion in net income. This is a nicely profitable business, despite the fact that earnings and sales are only expected to grow 4% this year. EBAY pays no dividend, but committed to capital return with their existing $2.5 billion share buyback announced in July.

One of the panelists suggested that success for FB Marketplace could pose a threat to EBAY over time, and it is hard to disagree with that. But I’d say in the near term, given the M&A environment, EBAY could be in play as possibly Alphabet (GOOGL), Alibaba (BABA), Apple (AAPL) or Amazon.com (AMZN) (basically any mega-cap tech stock that starts with an A) think about the threat FB could pose offering its 1.7 billion users one more reason not to search on Google or purchase on Amazon.com. In many ways, given the millions of searches that go on daily on EBAY, the embedded purchasing options, and the consumer data amassed, EBAY may fit the sort of takeover scenario that made LinkedIn (LNKD) so attractive to Microsoft (MSFT) and possibly Twitter (TWTR) attractive to GOOGL or Salesforce.com (CRM).  With one big BUT, EBAY has a very profitable business, that may be at an inflection point not seen in years, while LNKD & TWTR have chunky earnings losses on a GAAP basis.

Oh and one more thing….data, data, data, thats the buzz.  Back in mid July, EBAY CTO Steve Fisher authored a blog post on the site titled “Replatforming eBay: How We Are Delivering the Shopping Destination of Choice“, here is the crux, but you know the drill, there will be large artificial intelligence/machine learning/big data elements:

“One of the biggest opportunities we have is to organize, catalogue, curate, and present our vast inventory in ways that enable every person who shops on eBay to find their version of perfect, no matter what it is. That’s why we have embarked on an ambitious, multi-year evolution of our shopping platform at eBay that aims to deliver relevant, persistent and personalized experiences for consumers.”

As I said in the clip last night, EBAY has actually outperformed PYPL since their split last year by a wide margin, despite being the one loaded with nearly $9 billion in debt.

EBAY is up 50% from its 2016 lows, and up 17% on the year, just a couple percent from recent all time highs.  In July the stock broke out to new all time highs on a Q2 beat and raise. Below the breakout level at $30, there is a massive air-pocket below to the high $20s:

EBAY 3yr chart from Bloomberg
EBAY 3yr chart from Bloomberg

So what’s the trade?

I would not be a buyer here in the stock based on the previous gap higher and upcoming earnings risk (10/19), but…  

this is the type of big consumer data that could eventually see rumors farther out. So one possibility here to define risk would be to use October call sales to finance farther out. With the stock 32.25, the Oct 35 calls can be sold at .32 and the Feb 33 calls can be bought for 1.95 creating a vertical calendar for 1.63.

$1.63 is the most that can be lost but it is leaning longer deltas (+25) than a same strike calendar so a move lower on earnings and the 33 calls in Feb may seem too far out of the money. But Feb is a long time for things to happen and selling the 35 calls in Oct on earnings should be enough room to the upside on most moves higher on earnings, and the vol sold at 44 in Oct is substantially higher than the 28 vol being bought in February.

There is some risk of a gap way higher than 35 in October earnings but the trade can;t lose money above that strike, but profits could be capped.