The Option Tip is to Buy eBay Calls before Wednesday Earnings Report
Options players, particularly the bulls, are hoping on a continued move higher by EBAY Ahead of Earnings.
S&P 500 (NYSE:SPY) component eBay, Inc. (NASDAQ:EBAY) will unveil its latest earnings on Wednesday, October 19, 2011. Ahead of this report, and in the face of the company's recent history of surpassing analysts' profit expectations, it is expected that the stock will continue its upward momentum as option expiration nears.
Description of eBay
eBay is an Internet company that, together with its subsidiaries, provides online marketplaces for the sale of goods and services. It also provides other online commerce platforms, online payment solutions, and communication offerings to a diverse community of individuals and businesses.
The Reasoning for the Option Tip
The online retailer is very popular with options players, as bullish bettors seem to be particularly fond of the stock. Data gathered from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) confirm that throughout the course of Thursday's trading session, speculators bought to open 4,792 calls and only 65 puts on EBAY -- bringing the equity's single-day call/put volume ratio to a respectable 73.72.
It seems this call-skewed trend is just continued behavior. The stock's 10-day ISE/CBOE/PHLX call/put volume ratio stands at 3.54. This ratio ranks in the 86th percentile of its annual range, indicating that calls have been bought to open over puts near an annual-high clip in recent weeks, which certainly gives a boost to the option tip.
Furthermore, the equity's put/call open interest ratio rests at 0.86. This ratio ranks in the 32nd percentile of similar readings taken over the past year. In other words, near-term options players are more bullishly aligned than usual toward EBAY.
In addition, short interest on the stock stands at a low 1.4% of the available float. As the percentage of shorted shares has increased a slight 0.2% over the past reporting period, it seems that very few traders are betting on the stock to decline.
John Donahue Statement Helps Option Tip
EBay Inc Chief Executive John Donahoe gave a positive outlook on Tuesday in the face of slowing economic growth and early signs of a weak holiday shopping season. He stated that:-
• EBay still sees strong growth and "steady" consumers. Economic weakness hasn't affected Marketplace or PayPal volumes in any significant way.
• EBay will spend more on marketing next year, after recently lifting marketing spending for the first time in several years.
• EBay has been adding employees this year and plans to keep hiring.
The Graph for the Option Tip
EBAY finds itself in the black by over 29% during the past 52 weeks, and is adding to that gain with a 2% increase in Friday's trading. Also, over the past 20 trading sessions, the equity has outperformed the S&P 500 Index (SPX) by over 11 percentage points, on a relative-strength basis.
Facebook and eBay
Facebook executive and eBay Inc. board member, Katie Mitic, unveiled a partnership between the two companies designed to create a new crop of e-commerce applications with social networking features. A definite plus for further fulfilling the option tip.
Mitic said on Wednesday that Facebook's so-called Open Graph -- the map of connections that Facebook users create with friends and online content -- will be integrated "seamlessly" into applications developed with certain eBay services and technologies.
EBay is trying to encourage outside developers to create applications for its e-commerce platforms and is making a particularly strong push in mobile commerce.
The company launched X.commerce, its new division aimed at software developers, at a conference in San Francisco on Wednesday.
Weaving Facebook features into e-commerce products has the potential to make online shopping a more personalized experience, by displaying people's thoughts about products on the virtual store shelves.
15 out of 27 analysts surveyed (55.6%) have a buy rating on eBay. This is below the mean analyst rating of 10 competitors, which average 82.3% buy ratings. Over the past 90 days, the average rating for the stock has moved up from hold to moderate buy.
On October 13th, 2011, eBay, Inc. (EBAY) was given a reiterated “neutral” by analysts at Piper Jaffray. The analysts now have a $36.00 price target on the stock.
Earnings Preview Overview which Impacts the Option Tip
Wall St. Earnings Expectations: The average estimate of analysts is for profit of 40 cents per share, a rise of 14.3% from the company’s actual earnings for the same quarter a year ago. During the past three months, the average estimate has moved down from 41 cents. Between one and three months ago, the average estimate moved down. It has been unchanged at 40 cents during the last month. For the year, analysts are projecting net income of $1.70 per share, a rise of 13.3% from last year.
Past Earnings Performance: Last quarter, the company topped estimates by 0 cents, coming in at profit of 40 cents per share against a mean estimate of net income of 39 cents. The company fell in line with estimates in the first quarter.
Wall St. Revenue Expectations: On average, analysts predict $2.91 billion in revenue this quarter, a rise of 29.3% from the year ago quarter. Analysts are forecasting total revenue of $11.51 billion for the year, a rise of 25.7% from last year’s revenue of $9.16 billion.
Re-visiting: In the second quarter, profit fell 31.2% to $283.4 million (22 cents a share) from $412.2 million (31 cents a share) the year earlier, but exceeded analyst expectations. Revenue rose 24.6% to $2.76 billion from $2.22 billion.
Revenue has risen the past four quarters. Revenue rose 15.9% in the first quarter from the year earlier, climbed 5.2% in the fourth quarter of the last fiscal year from the year-ago quarter and 0.5% in the third quarter of the last fiscal year.
The decrease in profit in the second quarter came after net income rose in the previous quarter. In the first quarter, net income rose 19.7%.
Stock Price Performance: During August 17, 2011 to October 13, 2011, the stock price had risen $2.49 (8.2%) from $30.25 to $32.74. The stock price saw one of its best stretches over the last year between January 28, 2011 and February 8, 2011 when shares rose for eight-straight days, rising 7.7% (+$2.33) over that span. It saw one of its worst periods between March 8, 2011 and March 16, 2011 when shares fell for seven-straight days, falling 6.1% (-$1.94) over that span. Shares are up $4.91 (+17.6%) year to date.
The Option Tip
Therefore, based on the information available, the option tip is to “Buy the eBay Inc. (EBAY) October 32 Call.”
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