eBay signals downtrend on lackluster Q1-2017 EPS view

In January end, e-commerce company eBay Inc (NASDAQ: EBAY) reported fiscal 2016 fourth-quarter earnings that beat analysts’ estimates. The quarterly revenue was also in line with the market’s expectation. This propelled the stock price of eBay to $34 levels in the past two weeks. However, considering the soft outlook for the Q1-2017 and FY17, we anticipate the stock to remain range bound with bearish bias in the weeks ahead.

The San Jose, California-based company’s fiscal 2016 fourth-quarter revenues of $2.40 billion were 3% higher than $2.32 billion reported in the same period of fiscal 2015, and in line with analysts’ estimates.

For Q4-2016, eBay posted earnings from continuing operations of $5.95 billion or $5.31 per share, compared with $523 million or $0.43 per share in Q4-2015. The GAAP earnings increased considerably in the recent quarter, compared with last year, mainly due to a $4.6 billion income tax benefit.

eBay

Excluding tax benefits and $800 million gains from the sale of holdings in MercadoLibre Inc., the fourth-quarter 2016 non-GAAP earnings from continuing operations was $601 million or $0.54 per share, up $1 million from $600 million or $0.50 per share in the fourth-quarter of 2015. The FactSet analysts’ anticipated eBay to report Q4 earnings of $0.53 per share.

To understand why the results will not be too appealing to investors, we shall look at the revenue and earnings growth of eBay’s main competitor Amazon (NASDAQ: AMZN). Compared to the paltry revenue growth of 3%, Amazon reported a 22.4% y-o-y increase in revenue to $43.75 billion in the fourth-quarter. Likewise, net income grew 55.4% y-o-y to $749 million. Due to the stupendous growth record, Amazon commands a huge premium over other e-commerce stocks.

For the first quarter of 2017, eBay anticipates revenue growth of between $2.17 billion and $2.21 billion. The GAAP earnings are expected in the range of $0.25 to $0.40 per share. The non-GAAP earnings are anticipated to be between $0.46 and $0.48 per share. The management’s outlook is lower than the analysts’ earnings estimate of $0.50 per share on revenues of $2.21 billion.

The price to sales ratio of the stock is 4.3, while the five year average is 4.0. Likewise, the price to cash flow ratio of 13.8 is greater than historic average of 10.8. Thus, it is amply clear that the stock price is slightly overvalued. So, fundamentally, there is a high probability of a correction in the stock price.

The price chart indicates minor resistance for the stock at 34.50. The high 90s reading of the stochastic oscillator indicates a technically overbought situation. Thus, a trader can look forward to a price correction in the stock.

By purchasing a put option, a trader can look forward to gain from the probable decline in the share price. The binary trader should make sure that the put option remains valid for seven trading days. Furthermore, ideally, a trader should invest in the contract when the stock trades near $34.