eBay (EBAY) Looks Vulnerable to a Correction

eBay Inc. (EBAY) reports second quarter 2020 earnings after Tuesday's closing bell, with analysts expecting a profit of $1.06 per share on $2.8 billion in revenue. The stock closed higher after the company beat first quarter estimates and raised second quarter guidance in April, ahead of a strong uptrend that has now carved a series of all-time highs. Even so, the quarter was marred by June indictments of former employees accused of threats against a writer critical of the e-commerce giant, allegedly at the direction of executives.

Key Takeaways

  • eBay stock has posted a 60% return so far in 2020.
  • The stock looks fully valued ahead of earnings.
  • An intermediate correction could shake out weak hands and reach the upper $40s.

The company has benefited from rapid market share gains in the digital retail space as a result of the COVID-19 pandemic. However, the stock price has more than doubled since the March low and posted a 60% return so far in 2020, raising legitimate questions about valuation. In addition, relative strength oscillators have now risen to the most overbought level in the company's 22-year public history, raising the odds for a correction that shakes out overly complacent shareholders.

Wall Street doesn't seem fazed by eBay's rapid price gains, with consensus at a "Moderate Buy" rating based upon 10 "Buy," 14 "Hold," and 1 "Sell" recommendation. Price targets currently range from a low of $44 to a Street-high $77, while the stock is trading less than $2 below the median $59 target. Given this placement, additional upside could require beating current expectations in Tuesday's confessional.

Valuation is the analytical process of determining the current (or projected) worth of an asset or a company. There are many techniques used for doing a valuation. An analyst placing a value on a company looks at the business's management, the composition of its capital structure, the prospect of future earnings, and the market value of its assets, among other metrics.

eBay Long-Term Chart (1998 – 2020)

Long-term chart showing the share price performance of eBay Inc. (EBAY)

eBay stock rocketed higher after coming public at a split-adjusted $0.88 in September 1998, topping out at $12.15 in April 1999. A failed March 2000 breakout attempt yielded aggressive selling pressure, dropping the stock to $2.78 at the start of 2001. That marked a buying opportunity, ahead of 2003 breakout that topped out in the mid-$20s in 2005. The subsequent decline held above the 2001 low when the bear market ended in 2009, setting the stage for a 100% retracement into the prior decade's high in 2013.

That level marked an impenetrable barrier into a 2016 breakout that stalled in the mid-$40s in 2018. The stock tested breakout support in December of that year and again in March 2020, establishing a long-term trading floor, ahead of a June breakout that added about 15 points into July's all-time high at $61.06. Price action between March and July carved no pullbacks, adding instability that now raises the odds for a deep correction.

A pullback is a pause or moderate drop in a stock or commodities pricing chart from recent peaks that occur within a continuing uptrend. A pullback is very similar to retracement​ or consolidation, and the terms are sometimes used interchangeably. The term pullback is usually applied to pricing drops that are relatively short in duration.

eBay Short-Term Chart (2018 – 2020)

Short-term chart showing the share price performance of eBay Inc. (EBAY)

The on-balance volume (OBV) accumulation-distribution indicator tells a bullish tale, breaking out well ahead of price in April. Impressive buying power into July underpinned the upside, but OBV is now rolling over, suggesting that the momentum crowd is taking profits and stepping to the sidelines. Taken together with extremely overbought relative strength readings, the stage may be set for a pullback that stretches into the upper $40s.

A Fibonacci grid stretched across the 2018 downtrend adds to this cautionary theme, with the rally reversing at the 1.618 extension. This is a common turning point after strong breakouts, with downside targets at the 1.27 and 1.00 support levels. The 50-day exponential moving average (EMA) is lifting toward the higher harmonic extension near $53, marking the first selloff target, with the potential for additional downside into the 2018 peak in the upper $40s. 

The Bottom Line

eBay stock has posted impressive gains since March, but the reward-to-risk profile doesn't favor new long-side entries at this time.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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