This article analyzes eBay stock (NASDAQ:EBAY) in the context of the company's second quarter earnings report.
On Friday, July 21, 2017, eBay Inc. filed its second quarter earnings report. For the three months ended June 30th, 2017, eBay reported $2.32 billion in net revenues. Q2 net revenues from 2016 were $2.23 billion. However, cost of net revenues increased as well. This resulted in gross profit of $1.76 billion. Gross profit from Q2 2016 was $1.73 billion. In addition, increases in SG&A expenses and income taxes lowered net income.
Currently, eBay stock currently trades at $36.50.
2016 Q2 Diluted Net Income per Share: .38
2017 Q2 Diluted Net Income per Share: .02
Amended Accounting Standard for Revenue Recognition
In the first quarter of 2018, eBay is adopting the FASB's new (issued in 2014) accounting guidance for revenue recognition. Specifically, eBay's accounting for seller listing fees and listing promotions are affected. The new amendment deals with the scope of performance obligations (PwC).
In 2018, eBay will begin recognizing these fees as revenue after an item sells. Therefore, this will put pressure on the company's Q1 earnings report for 2018. However, a positive effect is eBay's financial statements will be more conservative. In addition, this new method will not affect eBay's statement of cash flows.
eBay Stock Fundamentals & Technicals
Now, using eBay's Q2 diluted earnings, the company has a trailing, twelve-month (ttm) diluted EPS of 6.52. At a price of $36.59, this gives eBay stock a P/E (ttm) ratio of 5.61. eBay does not currently pay a dividend. Unfortunately, this makes eBay stock inherently more volatile from 100% earnings retention. Also, given its current stock price, eBay Inc. has a market capitalization of roughly $39 billion.
Now, the technical outlook based on an intermediate-term outlook (6 weeks- 9 months) is more skewed towards bullishness. Support and resistance levels are as follows:
Furthermore, several important issues affecting eBay's operating and net profit margins over the last year include:
1) provisions for income taxes;
2) foreign currency gains and losses;
3) ordinary period expenses (sales and marketing, product development, and general and administrative).
Therefore, eBay's massive drop in profitability is not due to a deterioration in the underlying business.
EBAY Stock Rating
In conclusion, eBay stock is one of the most conservatively-priced tech companies in the stock market. However, its earnings are currently depressed from one-time expenses. In addition, fluctuations in non-core asset accounts (foreign currency translation) are not helping. Our expectation is the financials will experience a mean-reversion from the next couple earnings reports. Afterward, the stock should react positively. Therefore, we are adding eBay stock to our Bullish List.