eBay (NASDAQ:EBAY) saw positive action after it released earnings on Wednesday. While not beating consensus estimates, the second quarter came off rather well with respect to year-over-year comparables.
The analysts for the most part still have eBay as a buy, with positive price targets revised slightly lower. According to the Analysts Network, the consensus estimate is at roughly 14% - 15% in upside potential. After an earlier surge in the stock price due to the Icahn attempt to split PayPal from eBay, analysts had expected more from the stock. Now, they appear to believe it is still a buy, but not with as high a potential for increase, and therefore they have decreased the price targets marginally while keeping them higher then the actual stock price.
We can discuss many things with respect to eBay, I think some other Seeking Alpha authors have done an excellent job at this. You can read a quick assessment of the earnings and a brief summary of the current market position in another Seeking Alpha article right here. I think if this article was summed up in a SWOT analysis we would see a lot of dangers ahead for eBay. Among the threats we would see that Alibaba's emergence in the United States will impact eBay, as well as the increasing differentiation in the offering of Amazon (NASDAQ:AMZN). With Google continuing to expand into the market area of PayPal, which is eBay's most profitable component, we can easily see that the threats seemingly outweigh the positive opportunities for eBay.
Icahn was most likely correct in his analysis which indicated that the company was better in stripping down its value chain and spinning off PayPal. This would have resulted in a more tightly run eBay and PayPal with value chain activities more closely tailored to the individual customers that each company serves.
Once again, enough has been said on this topic and you can read about it almost anywhere. The above linked-to SA author appears to believe that the stock is not a buy because the company has little upside potential from a strategic perspective and also from a stock valuation multiple perspective (or fundamentals perspective). What I would like to contribute to the potential investor is a quick analysis of the performance of analysts with respect to this stock, because they have it as a buy despite the negatives.
Here is a visual snapshot of the historical performance by analysts during the last year as plotted out against a timeline by TipRanks.
Other then the point in March when the stock increased due to Icahn attempting to break the company into more economically efficient units, the stock has essentially been running flat despite the analyst consensus rating the stock as a buy.
I put together a simple linear regression analysis which can be helpful in determining the value of analyst contribution to the discussion. The Analyst Network (as linked to above) was used for two years of data consisting of 187 different price targets. Google Finance was used for the actual price info. For the excel spreadsheet containing all of this data and the regression models and all of the formulas you can download it right here.
Below are two charts with the subsequent average price plotted along the y-axis as the dependent variable and the price target set by analysts along the x-axis as the independent variable. In this way we can determine how much of the change in price is explained by the analyst price target.
This is the analyst price target plotted against the subsequent closing average price for the duration of one month:
And here is the subsequent average closing stock price for 6 months as plotted against the analyst price targets:
What is important to recognize here is that the points are all over the place indicating that the analysts really haven't been able to figure out the key drivers that contribute to this stock's success or failure. This is a problem. Perhaps the investing community is overly hopeful with respect to eBay's potential, while the company is unable to focus on a key area to drive value creation. Perhaps the company is actually a strong company, but unfortunately structured in a way that cannot allow management to realize its full potential.
So just how successful have the analysts been over the last two years? We can answer this in the following chart:
Our R^2 shows the fitness of the regression model. As one can see we have 0.2515 or 25.15% accuracy for the 6 month model and 0.3615 or 36.15% level of accuracy for the 1 month performance. This means that analysts have had price targets that correlated with the actual price performance about 1/3rd of the time with respect to 1 month performance and about 1/4 of the time with respect to 6 month performance. This is not very good, even for Wall Street Analysts.
So what is the point in all of this? It is easy to get lost in the math and the data. But really the story here isn't in the data, the numbers, or the regression analysis. What this data shows us and what the regression analysis really shows us is that analysts have a historically inaccurate appraisal pertaining to the future performance of this stock in particular. We often see this in companies that are actually rather good with respect to many functions considered separately, but where the company continues to struggle due to managements ability to run a company with fragmented market exposure. eBay has many positives, but it also has trouble aligning its value chain. eBay has the online auction business and the PayPal online banking business. As Icahn had suggested, it is probably time for eBay to seriously consider aligning its value chain to the market need. I am therefore not a buyer of eBay currently, but I will be awaiting positive changes along the side-lines.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.