eBay a Short-Term Sell and Long-Term Buy

Shares of eBay (Nasdaq: EBAY) fell roughly 5% after hours Wednesday, following the company’s third quarter results. eBay’s earnings per share were in line with the analysts’ consensus forecast. However, just meeting expectations is not good enough for a company that has a consistent record of beating the Street. Yahoo Finance indicates eBay exceeded expectations for at least the last four consecutive quarters heading into Q3. Furthermore, the company’s guidance for the coming quarter and the full year were not impressive when compared with the consensus of analysts’ views for the shares. Thus, eBay (Nasdaq: EBAY) joins Apple (Nasdaq: AAPL), IBM (NYSE: IBM), VMware (NYSE: VMW) and Cree (Nasdaq: CREE) in resetting investor expectations and equity valuations.

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Relative tickers include: Nasdaq: AAPL, Nasdaq: CREE, NYSE: IBM, NYSE: VMW, NYSE: ATV, Nasdaq: AMZN, OTC: ARIS.OB, Nasdaq: BIDZ, Nasdaq: DLIA, Nasdaq: DANG, Nasdaq: EBAY, Nasdaq: GAIA, Nasdaq: IACI, Nasdaq: LINTA, Nasdaq: OSTK, Nasdaq: PCCC, Nasdaq: STMP, Nasdaq: VVTV and Nasdaq: VITC.

eBay a Short-Term Sell and Long-Term Buy

eBay beat the Street on the top line, making $2.97 billion against expectations for $2.91 billion, based on Factset data. eBay reported a 32% increase in revenue against the prior year quarter, attributing its growth to each of its business segments. However, investments made to assimilate acquisitions and market the brand, and some difficulty with the learning curve on mobile business led it to only earn the $0.48 per share (on a non-GAAP basis) that analysts were looking for. According to Yahoo Finance, over the last four quarters, eBay beat estimates by between 2% and 11%. Thus, expectations for the same were likely built into the company’s valuation, and so were squeezed out of it on Wednesday evening. However, by 8:00 PM ET, and after the conference call concluded, the stock had mitigated its decline to minus 4%.

The company’s Payments business generated a 32% net revenue increase, to $1.107 billion. Within Payments, its merchant services business grew sharply in Q3, with net total payment volume rising 36%. eBay’s signature Marketplaces operations generated a 17% net revenue rise, to $1.653 billion. Within this segment, its international gross merchandise volume exceeded the rate of growth in domestic volume, growing 18% to $9.078 billion. The company’s GSI business, the operations just acquired in Q2, generated $203 million in net revenue.

A key problem with the quarter, as far as investors indicated Wednesday evening, was the contraction of the operating margin. Also, it looks as though the margin will hold stubbornly lower than the comparable period through Q4 as well. eBay’s net operating margin was squeezed to 25.3% on a non-GAAP basis in Q3, from 28.7% last year. Executives on the call attributed the contraction to acquisitions, including of GSI, and to business mix. Increasing business via mobile phones played at a higher cost than was expected to be the case. As the company moves up the learning curve, according to executives on the conference call, things should improve. The effective tax rate was also unfavorable against the prior year comparison, but the company’s executives focused their discussion on costs, and assurances of expected improvement over coming quarters. eBay also experienced a higher effective tax rate and completed its share repurchase program in the quarter.

When it came to guidance, eBay raised its outlook, but it seems not enough to satisfy investors. The company guided for a Q4 revenue range of between $3.2 billion and $3.35 billion, but the average of the two points was a bit short of the analysts’ consensus, which according to Yahoo Finance, sits at $3.3 billion. Also, the company’s fourth quarter EPS forecast for between $0.55 to $0.58 matches poorly against the consensus estimate for $0.58. eBay’s full year 2011 revenue forecast for between $11.5 billion and $11.6 billion sits well against the analysts’ consensus estimate for $11.51 billion. However, the company’s EPS forecast range of between $1.98 and $2.01, which is a penny higher than previously forecast, only encompasses the analysts’ consensus view for $2.00. Again, investors were likely looking for more.

Given eBay’s risk tied to the euro and its questionable forecast for an okay holiday season, which is certainly at risk, there appears to be good enough reason to temper short-term enthusiasm for the shares. However, eBay’s Paypal expansion to point of sale, with a beta test at play with one major retailer this Q4, could set this company’s growth into a higher gear in the next few years. According to Yahoo Finance, the company’s P/E/G ratio sits at 1.4, with growth forecast at 12.1% over the next five years. Thus, it seems to me that its trading range should not vary much in the near-term, with downside cushioned by its potential for greater long-term growth and its upside burdened by current issues. Therefore, while I’m cautious over the short-term, based on cost pressures, macroeconomic risks, and what I see as deteriorating broader market sentiment, I would put eBay in a category of names to look up again on weakness based on its opportunity in the emerging blockbuster point of sale business. Therefore, a hold rating would be in order for this stock today for most investors, and depending on your patience and investment style, I would label it a short-term avoid (weak sell) and long-term accumulate (weak buy).

This article should interest investors in Catalog and Mail Order House stocks including Acorn International (NYSE: ATV), Amazon.com (Nasdaq: AMZN), ARI Network Services (OTC: ARIS.OB), Bidz.com (Nasdaq: BIDZ), dELiA’s (Nasdaq: DLIA), E-Commerce China Dangdang (Nasdaq: DANG), eBay (Nasdaq: EBAY), Gaiam (Nasdaq: GAIA), IAC/ InterActiveCorp (Nasdaq: IACI), Liberty Interactive (Nasdaq: LINTA), Overstock.com (Nasdaq: OSTK), PC Connection (Nasdaq: PCCC), Stamps.com (Nasdaq: STMP), ValueVision Media (Nasdaq: VVTV) and Vitacost.com (Nasdaq: VITC).

The day's EPS reports came from American Express (NYSE: AXP), Xilinx (Nasdaq: XLNX), Abbott Laboratories (NYSE: ABT), Wynn Resorts (Nasdaq: WYNN), St. Jude Medical (NYSE: STJ) and U.S. Bancorp (NYSE: USB). Also look for news from 8X8 (Nasdaq: EGHT), Access National (Nasdaq: ANCX), Amphenol (NYSE: APH), AMR (NYSE: AMR), Amylin Pharmaceuticals (Nasdaq: AMLN), Apollo Group (Nasdaq: APOL), Astoria Fin’l (NYSE: AF), ATMI (Nasdaq: ATMI), Bank of New York Mellon (NYSE: BK), Banner (Nasdaq: BANR), BlackRock (NYSE: BLK), Buffalo Wild Wings (Nasdaq: BWLD), Cardinal Fin’l (Nasdaq: CFNL), Cathay General Bancorp (Nasdaq: CATY), Central Valley Community (Nasdaq: CVCY), Cheesecake Factory (Nasdaq: CAKE), Cirrus Logic (Nasdaq: CRUS), Cohen & Steers (NYSE: CNS), Cohu (Nasdaq: COHU), Comerica (NYSE: CMA), Community Trust Bancorp (Nasdaq: CTBI), Core Laboratories (NYSE: CLB), Covanta (NYSE: CVA), Cubist Pharmaceuticals (Nasdaq: CBST), CVB Financial (Nasdaq: CVBF), CYS Investments (NYSE: CYS), Datalink (Nasdaq: DTLK), DiamondRock Hospitality (NYSE: DRH), E*Trade Fin’l (Nasdaq: ETFC), East West Bancorp (Nasdaq: EWBC), eBay (Nasdaq: EBAY), Edwards Lifesciences (NYSE: EW), Exponent (Nasdaq: EXPO), F.N.B. Corp. (NYSE: FNB), Fidelity National Financial (NYSE: FNF), First Cash Financial (Nasdaq: FCFS), Forward Air (Nasdaq: FWRD), Freeport-McMoRan Copper & Gold (NYSE: FCX), Greenhill (NYSE: GHL), Gulfmark Offshore (NYSE: GLF), Heritage Crystal Clean (Nasdaq: HCCI), IDEX (NYSE: IEX), iParty (AMEX: IPT), Kinder Morgan Energy Partners (NYSE: KMP), Kinder Morgan Management (NYSE: KMR), Knight Capital (NYSE: KCG), Knoll (NYSE: KNL), Lam Research (Nasdaq: LRCX), LaSalle Hotel Properties (NYSE: LHO), Lufkin (Nasdaq: LUFK), M&T Bank (NYSE: MTB), Mastech (NYSE: MHH), Media General (NYSE: MEG), MKS Instruments (Nasdaq: MKSI), Morgan Stanley (NYSE: MS), New York Community Bancorp (NYSE: NYB), Noble (NYSE: NE), Northern Trust (Nasdaq: NTRS), NVE Corp (Nasdaq: NVEC), Piper Jaffray (NYSE: PJC), PNC Fin’l (NYSE: PNC), Polycom (Nasdaq: PLCM), Popular (Nasdaq: BPOP), Raymond James (NYSE: RJF), Riverbed Technology (Nasdaq: RVBD), Rockwood Holdings (NYSE: ROC), S.Y. Bancorp (Nasdaq: SYBT), SEI Investments (Nasdaq: SEIC), Select Comfort (Nasdaq: SCSS), Sensata Technologies (NYSE: ST), SLM (NYSE: SLM), Spartan Stores (Nasdaq: SPTN), Stepan (NYSE: SCL), Stryker (NYSE: SYK), Supervalu (NYSE: SVU), Swift Transportation (Nasdaq: SWFT), Temple Inland (NYSE: TIN), Texas Capital Bancshares (Nasdaq: TCBI), Textron (NYSE: TXT), Tractor Supply (Nasdaq: TSCO), Travelers (NYSE: TRV), Umpqua (Nasdaq: UMPQ), United Technologies (NYSE: UTX), Virginia Commerce (Nasdaq: VCBI), West Corp. (Nasdaq: WSTC), Westamerica Bancorp (Nasdaq: WABC), Westell Technologies (Nasdaq: WSTL), Western Digital (NYSE: WDC), Westwood Holdings (NYSE: WHG), WNS Holdings (NYSE: WNS) and Zhone Technologies (Nasdaq: ZHNE).

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