eBay: Quick Profits

| About: eBay Inc. (EBAY)
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Summary

I have opined this name is a trading vehicle but a lousy investment.

Q4 earnings are out.

Momentum is there but wait for the timing.

It has been well over a year since I initiated coverage eBay Inc. (NASDAQ:EBAY). As I told you in the past I used the site to sell a ton of old sports cards and memorabilia, as well as some random items including printer cartridges, video games, unopened posters and more. PayPal, its once subsidiary has now been separated into its own standalone company. As a stock, to me, it's never been reliable as an investment, however, you can always cherry pick a time frame to argue against this assessment. I personally view it as a trading vehicle. That said, when I last reiterated how much of a trading vehicle this was the stock proceeded to drop 12-13%, only to rebound to new 52 week highs, all in a matter of a few months. Hence the trading power. From a longer-term investing perspective, the stock has mostly traded sideways since I opened coverage. But now the name seems to have momentum following just reported earnings. In short, you make quick profits in this one, when timed properly.

There was nothing overly impressive about the quarter although the company did deliver better than anticipated results in some areas, while mostly meeting analyst estimates for performance. eBay's fourth quarter revenue increased 3.4% year-over-year to $2.4 billion, and this essentially matched estimates. GAAP earnings came in at $5.9 billion or $5.31 per share. Whoa. That is way higher than normal right? Yes, but this is driven by a $4.6 billion income tax benefit and an $800 million dollar gain from the sale of its equity position in MercadoLibre. If we look at adjusted earnings we see these rolled in at $601 million, or $0.54 per share. This is up nicely year-over-year and was another record for the company.

Of course the headlines only tell us so much. I think a good place to check the health of the company is eBay's gross merchandise volume. This metric saw growth on a constant dollar basis. If we exclude the negative impact of currency related issues which are plaguing all domestic companies, the gross merchandise volume increased 5% year-over-year. Of course absolute year-over-year comparisons are complicated because foreign currency movements continued to have a negative effect, impacting the revenue growth rate of the eBay Marketplaces and of course StubHub.

One place of year-over-year disappointment was the operating margin. Operating margin dropped precipitously to 26.6% versus 28.5% last year. However, this is a rise from last quarter's 24.4%. Another negative was taxes which came in at 24.4% versus 23.8% last year (this excludes the $4.6 billion benefit I mentioned above boosting GAAP earnings). They were also up from last quarter. Cash flow was higher, coming in at $620 million of operating cash flow and $484 million in free cash flow. What is important to also point out, and this is good for long-term investors, the company bought back $1 billion in stock or 34.6 million shares in the quarter. David Wenig, President and CEO of eBay said:

"Q4 was a record quarter highlighted by solid performance in our eBay business. During the holiday season, eBay was one of the top consumer shopping destinations in the world and the second most visited eCommerce site in the U.S. In 2017, we intend to accelerate the progress that we made last year as we continue to execute our business strategy."

The stock is getting a bit of momentum as the outlook was rather positive. For 2017, the company expects net revenue between $9.3 billion and $9.5 billion, representing constant dollar growth of 6% to 8%. Adjusted earnings per diluted share from continuing operations is expected to ring in at $1.98 to $2.03. This is rather strong growth from the adjusted earnings of $1.88, although the price of the stock from a multiple perspective appears fairly valued relative to most standard retailers. That said, I still prefer you to trade this one. Let the stock fall back then do some buying. This one is good for 5-10% swings up and down quite frequently.

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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.