eBay – Take it and Bid it

by Dan April 11, 2018 1:45 pm • Trade Ideas

Shares of eBay (EBAY) are up 2.5% today on a rating upgrade from Keybanc, per Barron’s Online:

the analysts wrote, “has successfully transitioned to a destination for compelling prices, and initiatives to enhance customer experience and attract brands should lead to continued gross merchandise volume acceleration in 2018.”

They also said eBay’s search results were improving and that customer support tools powered by artificial intelligence could help costs.

• KeyBanc characterized eBay (EBAY) as a “better place for consumers to shop,” citing more fixed-price goods, new merchandise, and guaranteed delivery—the kind of things customers of Amazon.com (AMZN) would expect, rather than old-school eBay users willing to trawl the site for deals.

Barron’s went on to highlight eBay CEO’s commentary from an industry conference in February about the rapidly changing retail landscape:

 eBay CEO Devin Wenig told investors at a conference that his company had turned the corner, moving from one “wired for a particular use case that was 20 years old”—the online “garage sale”—to one ready for the “absolute revolution of e-commerce around the world.”

Wening told investors (according to a transcript on FactSet) that retailers need to prepare to be big to make it through the next few years of evolution in the business: “What is going to emerge from the retail landscape, which is $17 trillion, is a couple of very big omni-channel…shopping destinations,” he said, “and we’re going to be one of them.”

Today’s upgrade is interesting as it came with the stock down 15% from its 52-week and all-time highs made in early February, the day after their Q4 earnings which resulted in the stock gapping up 14%. The stock found some decent technical support at the prior breakout level in January in the $39-$40 range:

As far as sentiment, Wall Street analysts are very mixed on the stock with 19 Buy ratings, 18 Holds and 2 Sells. This despite very reasonable valuation for a mega-cap tech stock that trades at a market multiple of about 17.5x despite 15% expected eps and sales growth in 2018.

The next identifiable catalyst for EBAY will be their Q1 results on April 25th. The options market is implying about a 7% move between now and April 27th expiration (most of that implied movement for earnings).

So what’s the trade? If you thought a beat and raise would cause the stock to rise possibly 10% in the days following results, back to technical resistance near $44-$45 you might consider the following defined risk strategy:

Trade Idea: EBAY ($40.65) Buy May 41 / 45 call spread for $1.25

-Buy to open 1 May 41 call for 1.60

-Sell to open 1 May 45 call at 35 cents

Break-even on May expiration:

Profits of up to 2.75 between 42.25 and 45 with  max gain above 45

Losses of up to 1.25 between 41 and 42.25 with the max loss of 1.25 below 41