It is, it seems, almost impossible to find a positive voice regarding eBay (EBAY). When they announced results on Tuesday all the focus was on the negative. I have said it before and I’ll say it again, when seemingly everybody agrees, the opposite view is worth exploring, so, is it possible to make a case for buying eBay at these levels... yes it is.
Most of the attention has been focused on one surprising piece of news. The decision to repatriate $9 billion of profits held overseas, and in the process incur a $3 billion tax bill, was regarded by most as folly in the extreme. The smart kids, like Apple (AAPL) for example, just borrow at the prevailing low rates to fund anything they need, even if that is to buy back their own stock.
Yesterday’s 5% drop in eBay’s stock price, however, was presumably more driven by a legitimate worry about lower guidance for Q2 than a sense of dismay that one corporation, at least, had decided to do what many regard as the right thing. I generally try to keep feelings out of trading and investment decisions, but I cannot deny that, in these days when we are constantly reminded that corporations are people, there is something appealing about a company decision that hints at that most human of characteristics, a conscience. That led me, like a big old softy, to look for positives in eBay’s news. I didn’t have to look too hard.
There is no doubt that lower guidance is bad, but lower guidance without a plan to do anything about it is worse. Bringing that cash home to put it to work makes sense when you consider where eBay is making money. Their original online auction business is a little weak but still growing (Gross Merchandise Volume +12%), but it is the acquisition of PayPal that is looking smarter every quarter (Total Payment Volume +27%). Even Carl Icahn has stopped demanding a spinoff.
The statement by CEO John Donahoe that returning the cash would give greater “financial flexibility” hints at further acquisitions down the road and to me that is a positive. Should core business falter, some degree of diversification can only be a good thing. Funding that by repatriating profits is not popular, but, once again on a purely human level, there is something to be said for using cash, rather than debt, to make purchases.
As those growth numbers would suggest, if the tax write-off is removed, Q1 results for eBay were not actually that bad. On a non-GAAP basis they beat expectations, both in terms of revenue ($4.3 Billion vs. $4.22 Billion) and EPS ($0.70 vs. $0.67). Even that lower guidance wasn’t terrible, with EPS expected at $0.67 to $0.69. Analysts’ consensus prior to that announcement was for $0.70. As I said, lower guidance is always bad, but this doesn’t seem to merit a big drop.
Yesterday’s move is probably overdone, and has left a blue chip tech company that is still growing trading at a discount to the general market. That looks like a decent buy to me, even if eBay is breaking with the current corporate trend and meeting its obligations to its native country.
The relatively straightforward technical analysis that I prefer would also suggest that eBay is not just a buy on this dip, but also a relatively low risk trade idea.
“Low risk” may seem a strange choice of words when the 1 year chart or EBAY shows this kind of volatility. In reality, though, all of that volatility has been contained in a fairly tight range. Other than one failed test of the support, the stock has traded in a roughly $50-60 range. The proximity to the bottom end of that range gives the opportunity to control potential losses with a stop around 10% away, just below $48, but leaves plenty of room to the upside.
Support and resistance aside, though, the positive case for eBay is simple; they are a growing company that is priced as if it were in terminal decline. The decision to act like a good corporate citizen, to live within their means and meet their obligations, is nice, but at the end of the day you can’t beat good old fashioned value as a reason to invest.