Y-O-Y decline in operating margin halts eBay’s onward march

The shares of consumer-to- consumer and business-to- consumer e-commerce company eBay Inc. (NASDAQ: EBAY) hit a 12-month high of $32.81 last month. The market participants attribute the rise in the share price to the better than expected second-quarter results.

While we acknowledge the tremendous efforts put forth by the company to increase the top and bottom line, we also believe that the share price has reached a temporary peak and further uptrend may happen only after the company begins to see its efforts start bearing fruits. eBay closed at $32.49 on Monday.

The San Jose, California-based company reported Q2 2016 net income from continuing operations of $437 million or $0.38 per share on revenue of $2.23 billion, compared to $430 million or $0.35 per share on revenue of $2.110 billion in the Q2 2015. Excluding charges, the second-quarter net income from continuing operations decreased to $496 million or $0.43 per share, from $517 million or $0.42 per share in the similar period of 2015. However, on a per share basis, the Q2 2016 earnings for eBay increased to $0.43, from $0.42 per share in the corresponding quarter last year.

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A survey conducted by Thomson Reuters indicated that the analysts expected eBay to report net income of $0.42 per share on revenue of $2.17 billion. The company bought $500 million worth shares under the repurchase program. Devoid of the share repurchase program, the company would have missed the analysts’ estimates by posting only an EPS of $0.40 in the second-quarter.

eBay’s online ticket sales portal StubHub reported a 35% y-o-y increase in the gross merchandise volume to $1.1 billion in the second-quarter of 2016. The revenue increased 40% y-o-y to $225 million.

During the quarter ended June 2016, the company added 1 million new customers. The company recorded a 4% y-o-y growth in the number of active buyers. To speed up loading of its web pages on a mobile device, the company has resorted to the use of Accelerated Mobile Pages (AMP) technology (video above). However, it will take few months for the company to start reaping the benefits of its efforts.

On a y-o-y basis, the company’s cost of revenue increased by 160 basis points. Likewise, the operating margin of 29.1% in the Q2 2016 reflected a decrease of 300 basis points compared to the similar period last year. The forward P/E ratio of the company is over 20, while the five year average is 19.42. Thus, considering these facts, we believe that the share price has peaked for the time being and it is better to remain short.

The rise in the share price from 23 to 32 can be split into two portions. The price movement from 23 to 30 was steep and extremely quick thereby indicating a lack of resistance. On the contrary, the price movement from 30 to 32 was relatively slow, thereby indicating an increase in the selling pressure. The stochastic is indicating an overbought scenario.

So, anticipating a fall in the price, a binary trader can purchase a one touch put option. Since the next major support for the stock is at 29, the trader can select a target price of $29 or greater. It would be also better if the contract remains valid for at least four weeks for the date of purchase.

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