EBAY’s AI Play

by riskreversal January 10, 2017 1:03 pm • Trade Ideas

Earlier I highlighted Intel’s (INTC) inability to fill in its earnings gap from late Oct when the stock declined 6% post results (read here).  Another stock that has failed to do so, despite the broad gains in U.S. stocks since early Nov is eBay (EBAY), which is down 2% as I write.  The one year chart of EBAY is fairly interesting, littered with earnings gaps both higher and lower, with obvious support very near the mid point of the 1 year range, a tad below its 200 day moving average of $28:

[caption id="attachment_69400" align="aligncenter" width="600"] EBAY 1yr chart from Bloomberg[/caption]

The next identifiable catalyst for EBAY will be their Q4 report on Jan 25th. The options market is implying about a 7.5% one day post earnings move, which is shy of the 4 qtr one day post earnings average move of 9.4%, but above the 10 year one day average of 6.2%.

With EBAY at $30 the Jan 27th 30 straddle (the call premium + the put premium) is offered at $2.55, if you bought that and thus the implied move between now and Jan 27th close, you would need a rally above $32.55, or a decline below $27.45 to make money, or about 8.5% (most of which is being priced for the earnings event).

Wall Street analysts are fairly lukewarm on EBAY with 14 Buys, 26 holds and 2 Sells. That’s a tad surprising for a consumer tech stock that trades below a market multiple, is expected to have 10% eps growth in 2017, and is cognizant of the trends in tech that get investors geeked up, last year launched a structured data initiative… AI is the magic word!!

Back in mid July, EBAY CTO Steve Fisher authored a blog post titled “Replatforming eBay: How We Are Delivering the Shopping Destination of Choice“. Here is the crux, 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.”

You get the point, stock is cheap, they buyback their stock and are thinking about how consumers will consume, or how they purchase in the briskly changing mobile social world. And while we are taking a worldview, in a time where tech companies are expected to repatriate hundreds of billions of dollars from overseas in the coming months/year, I am hard-pressed to see how a company like EBAY with its balance sheet, cash flow, valuation, customer base, consumer data, and a $33 billion market cap will not finally be in the sites of a large tech/consumer behemoth.  Just spit-balling here, in a world where MSFT can spend $26 billion for a massively unprofitable (GAAP) Linkedin, largely for data and integration possibilities with their own cloud initiatives, EBAY also fits this bill.

So What’s the Trade?

The implied move on earnings (Jan 25th) would take the stock to recent highs, just shy of about 33. That means that call calendars that sell that near term move (which is quite big to begin with) to play for further upside after the event (and expiration) may make sense. Right now the Jan27th/April 33 call calendar is about .50. That means you’re only risking .50 for a move back to recent highs that would likely be a double at that point with room to make much more on a breakout. But if the stock went down on earnings you’d likely lose most if not all of that 0.50, as it would then be significantly out of the money with few catalysts over the next few months. We’ll check back in closer to the event on other trade ideas.