The Smart Money Will Stay Away from eBay Stock After Earnings Stumble

On Wednesday after the close, eBay (NASDAQ:EBAY) reported its fiscal second-quarter earnings results. While the company beat on earnings, it missed on revenue. Worse, management provided lower-than-expected revenue guidance. The result has EBAY stock down 10% in Thursday’s trading session.

That’s obviously bad news for bulls, who have been riding a recent rally in the online auction company. However, it may have some investors wondering if now is the time to hop on.

eBay Earnings

Earnings per share of 53 cents came in two cents per share ahead of expectations. While revenue grew a respectable 9.1% year-over-year to $2.64 billion, this very slightly missed analysts’ estimates.

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On the guidance mark, management expects full-year earnings of $2.28 to $2.32 per share, which came in ahead of consensus estimates calling for $2.27 per share. However, sales guidance came up short, with management guiding for just $10.75 billion to $10.85 billion in sales, short of the $10.95 billion analysts were expecting.

As for the actual quarter, gross merchandising value climbed 10% YoY, (up 7% when including currency headwinds though). Active buyers rose 4% YoY, while gross margins fell 120 basis points to 25.2%.

I’m not sure that eBay stock deserves an 8.5% drumming on this quarter alone. It wasn’t a great result by any means, but to shave 10% off eBay’s value seems extreme.

Valuing EBAY Stock

We can’t fight the market, we can only navigate the path it lays down for us. In this case, we’ll take a deeper look at eBay stock to see if its valuation is signaling anything to buyers.

Let’s go with the midpoint of management’s expectations, since that seems to be a more accurate representation for what it will do this year. That would mean eBay earns $2.30 per share on $10.8 billion in total revenue.

That would represent 12.8% sales growth over the prior year, (below consensus expectations for 14.5% growth). Its earnings result of $2.30 per share would represent 15% growth over 2017 (above the 13.5% growth analysts were modeling for.

How eBay does in 2018 also affects its growth numbers for 2019.

Based on current estimates and management’s 2018 guidance, eBay should churn out earnings growth of 13% in 2019. While respectable, that’s down from the 15% this year. Based on revenue estimates, eBay is forecast to grow sales 9.9%. Again this is good, but down vs. the prior year.

For this, we’re paying just under 15 times this year’s earnings for EBAY. That’s actually not a bad price for a stock growing sales close to double digits, with earnings growth over double digits.

The question is, will the Street give eBay any love?

Trading eBay Stock

chart of Ebay stock after ebay earnings

Click to Enlarge

Here’s sort of the problem with eBay: It’s chart looks like crap.

Pardon my bluntness, but Thursday’s 10% rout really put shares in a precarious spot. Shares blew through a trend-line of support (blue line) and the stock is now teetering on the support level of its downward trending channel. It’s been stuck in this declining range since February.

It now rests at what I consider the most vital level, $34. This level has been hard support for more than a year and before that, it was tough resistance. If this gives way, eBay stock officially falls into no man’s land.

I would still rather own other names than eBay. This, is a position I took in May, specifically preferring stocks like Nvidia (NASDAQ:NVDA), Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN). But those who do want to take a stab at eBay have a solid risk/reward near current levels. If $34-ish fails though, there’s really no reason to stay long.

Luckily though, InvestorPlace readers knew to play defense with eBay rather than offense thanks to our trade setup on Thursday before the report.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell was long NVDA and AAPL. 

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