(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
eBay Inc.'s (EBAY) stock has climbed by 21% over the past year, and a recent analyst's upgrade sees the stock rising an additional 40%. But options traders are betting eBay falls by over 15% by expiration early next year. Additionally, the stocks technical chart also suggests shares may head lower over the intermediate term. (See also: eBay Climbs on Morgan Stanley Double Upgrade.)
The options set to expire on Jan. 18, 2019, are showing that traders are betting eBay will fall to around $35.50, a drop of about 15% from the stocks current price around $41.50, using the $37 strike price put contracts. Those contracts have the most significant amount of open interest with nearly 13,400 open puts contracts.
Bearish Bets Build
The $37 put contracts are trading at price of approximately $1.70 per contract, and that means that the stock needs to fall below $35.30 for the options to break even. The open interest in those options has been steadily rising since the beginning of March when there were approximately 8,500 open contracts.
Big Trading Range
The long straddle options strategy for January expiration is pricing in a rise or fall of nearly 19% from the $40 strike. That is because the cost of buying one put, and one call is $7.55, placing the stock in a trading range of approximately $32.50 to $47.50. Even at the $40 strike, there is a bearish tilt, with roughly 3,600 open put contracts to only 1,300 open call contracts.
But not all is negative in the options market; there is one significant bet for shares to rise to nearly $47.50. The $45 strike price has approximately 10,700 open call contracts at a price of $2.50 per contract for expiration in January.
The technicals also support a decline, with the stock failing at a downtrend on multiple occasions, while the relative strength index continues to trend lower, since peaking at overbought levels above 70 in September 2017. It could lead to shares falling back to technical support around $40.
Morgan Stanley upped it's rating on eBay to overweight from underweight and put a $58 price target on the stock, nearly 40% higher than the stock's current price. This aggressive price target comes despite consensus estimates forecasting revenue growth to fall to 8% in 2019 from 15% in 2018, while earnings growth is seen rising to 15.7% from 14.5%, according to Ycharts. At $58 per share, eBay's stock would trade at nearly 22 times 2019 earnings estimates of $2.65 per share. Since 2015 eBay's forward P/E ratio has never traded above 18.
Fundamental Chart data by YCharts
For now, options traders are betting shares of eBay will fall, not rise, while the technicals also support that premise. But with the company set to report results April 25, everything could change immediately should those results be better than expected.
Michael Kramer is the founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.