eBay: 'Buy It Now' Or 'Bid' Your Way To A Substantial Cash Flow

| About: eBay Inc. (EBAY)

Summary

eBay has previously been known as a fast growing business with a high valuation multiple.

Recently, that has changed significantly, as the growth prospects and valuation are quite different.

Still, many income investors avoid the security due to its lack of a dividend.

This article details how you can generate income by "Buying It Now" or "Bidding" on shares.

For a long time, eBay (NASDAQ:EBAY) showed exceptional growth to go along with a very high valuation to match. Back around the turn of century, the company was earning around a penny per share on a split-adjusted basis, as compared to well over $2 per share during the last few years. During the tech bubble, the P/E ratio was easily in the triple digits. And even in the last decade, the average earnings multiple had been in the low-to-mid 20s.

A lot has changed since then. The company spun off PayPal in July of 2015 and the growth prospects certainly are not as robust as they once were. Yet, today you still have a company trading at a low double-digit multiple with a sturdy balance sheet. Moreover, eBay continues to generate substantial profits and is still expected to churn out more earnings through the years.

In other words, the lower share price recently could simultaneously indicate a lower "investment bar" should the company begin growing again. You can make a case that it's a company that you could be interested in partnering with.

Of course, the seeming problem for an income investor is that eBay does not currently pay a dividend. The company has been active on the share repurchase front and an eventual dividend payment has been speculated, but at present the dividend yield equals zero. Thus, income investors routinely take a pass, never considering the security as a potential investment.

Yet, this doesn't have to be the case. You can both own (or agree to own) shares and derive cash flow from doing so. Let's explore two ways that you could accomplish this.

"Buy It Now"

eBay is known as a bidding site, but the business has a feature where you don't have to mess around with this. It's called "Buy It Now." Instead of bidding and waiting, thinking about reserves, bidding again, etc., often you can select "Buy It Now" at a given price and be on your way.

The stock market also has this feature; it's called a market order. You could mess around with inputting bids (limits) and hoping your price is met, or you could agree to transact at whatever the going rate happens to be at the time.

Presently, the "Buy It Now" price or closing market price for eBay is $23.20. So it would cost you $2,330 or so to purchase 100 shares of the company, using round numbers including transaction costs. You now have a small underlying earnings claim on the business. Of course, we haven't yet derived cash flow from owning the security.

In order to generate income, you could sell a covered call on your 100 shares - agreeing to sell at a given price some time in the future. Here's a look at some available call options for eBay:

I used the January 20th, 2017 expiration date for the premiums noted above. I have no affinity for this expiration, but it gives you an idea of what is available on an annual basis. The "net" premium uses the most recent bid less $0.25 for transaction costs and fluctuations.

As an example, if you owned 100 shares of eBay and agreed to sell them at a price of $25 in the next year, you would receive $185 upfront for doing so. Here's a look at the same information presented in a slightly different manner:

With this table, you have the same strike prices and premium from above being used. The "premium yield" column details the amount of upfront cash flow that you could receive by making the agreement. The "max gain" column details the maximum gain that you could receive, including the strike price and premium.

This table puts to rest the notion that you cannot own shares of a company like eBay and simultaneously generate cash flow. You could receive a 7.9% upfront yield for agreeing to a maximum 15% gain or a 2.1% yield for agreeing to a maximum 30%+ gain in less than a year, as examples. Moreover, the cash flow would be immediate for agreement that may never play out. (Premiums can be taxed at different rates than dividends, but it nonetheless is cash available to you.)

Selling a covered call does not prevent against loss, but it does help boost lower returns. Should shares stagnate, decline or even increase up to your strike price, you would have preferred to sold the call. You still keep your shares, but you also received upfront cash.

The true risk involved relates to the potential opportunity cost of "capping" your gains. Should you agree to sell at $25 and shares jump to $30, you're stuck selling at $25. This is a very real risk and underlines the idea that you need to be happy with either outcome of the agreement.

"Bid"

Of course, eBay isn't eBay without bidding. Just as you could bid for a new set of silverware, you can do the same thing with shares of eBay (and get paid for doing so to boot). Here's a look at available put options, using the same expiration and "net" methodology as described above:

In this case, the strike prices represent the price at which you would be agreeing to buy shares within the next year. The premium represents the upfront cash flow that you would receive for making this agreement. So as an example, you could get paid ~$119 for agreeing to buy someone else's 100 shares at a price of $20 in the next year.

Here's a look at that same information with some additional metrics:

This table shows the same strike prices as above, using the same "net" premiums for selling a put option. The "premium yield" column details the amount of upfront cash you would receive based on the amount of capital you need to set aside. So as an example, if you agree to buy at $20 you need $2,000 (plus transaction costs) set aside. If you receive ~$119 for doing so, that equates to a 6% yield on your capital.

The cost basis column illustrates the price you are agreeing to after you take out the upfront premium. The final column shows you the discount that this would represent based on the current price. As the discount increases, the likelihood of shares reaching this mark decreases, and thus, the premium other investors are willing to pay you becomes less and less.

The important thing to keep in mind is that you are agreeing to buy shares in this scenario. It works a lot like bidding. If you believe the current price is fair, you could sell a put option near the current price. If you would like to own shares at a lower price, you could sell a put option at a strike price below the current market bids.

The risks are similar here in that a negative return is not prevented and there's nothing requiring the agreement to transact. Should you agree to buy shares at a price of $22.50 and shares jump to $30, your option would go unexercised and you might be kicking yourself for not just buying shares.

Once more it should be clear that you could derive income from this arrangement. In this case, you would be setting aside funds to potentially buy shares and get paid upfront for doing so. With the put options, you could agree to buy at a 12% to 36% discount and also collect a 1% to 10% yield on that capital you set aside.

In short, for the income investor I'd imagine that you wouldn't have given eBay more than a few minutes of thought. You likely know the business, remember that the share price was quite volatile/lofty around the turn of the century and found out that the security doesn't pay a dividend. What's next? Yet, that doesn't have to be the case.

By using the "Buy It Now" feature in the market and selling a covered call, you can both own shares and receive cash flow for doing so. In this particular case, you could generate a 2% to 8% yield by agreeing to sell at a 15% to 30% higher price. Alternatively, by "bidding" on shares - selling a put option - you could generate a 1% to 10% yield for agreeing to buy shares at a lower price. Naturally, there are many more possibilities, but the idea is that you can both own or bid on non-dividend paying stocks and still generate sizable cash flows.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.