(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Shares of eBay Inc. (EBAY) have slumped by nearly 20% from their highs of late January, including a big hit in mid-April after guiding the second-quarter outlook below expectations. Now, options traders are betting the e-commerce company's stock is poised for a rebound and see it rising over 8% by the middle of August.
The company will likely report results in the middle of July, and analysts are forecasting the company will report solid second-quarter results. The betting in the options suggests that traders are looking for the stock to rise following those results.
Traders have been betting that eBay stock will rise to about $39.75 by options expiration on Aug. 17. That is a rise of about 8.3% from the stock price of $36.70 on Monday. The $39 strike price calls have been seeing increasing interest over the past few weeks, with the open interest levels rising to over 7,000 contracts. With the options trading at a price of $0.75 per contract, the stock's price would need to increase to $39.75 for the buyer of those options to break even if held until expiration.
The long straddle options strategy for expiration in August implies shares of eBay will rise or fall by roughly 8.7% from the $37 strike price, placing the stock in a trading range of $33.80 to $40.20
Analysts are looking for eBay to report solid second-quarter results, with earnings seen climbing by about 14.2%, on revenue growth of a like amount versus the same period last year. Full-year results are expected to be solid as well, with earnings and revenue both expected to rise by about 14% as well.
The stock currently trades at roughly 14 times 2019 earnings estimates and when adjusted for 2019 earnings growth, its PEG ratio comes to 0.91. That is because earnings growth in 2019 is expected to accelerate to 15.5%, making shares of eBay cheap at current levels.
Options traders are betting ahead of eBay's quarterly results, with expectations being that results will be strong enough to boost shares going forward. The bullish bets may be a shift in sentiment from the previously bearish outlook.
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.