Why eBay, Inc. Was Up After Guiding Below Consensus

eBay Inc (NASDAQ: EBAY  ) announced earnings that beat consensus by a penny this week, but guided below expectations for the coming quarter. Usually this would cause a stock to drop the following day but not in eBay's case, The key is expectations versus sustainable growth. Sales tracking reports from ChannelAdvisor suppressed expectations for eBay ahead of the quarter, leading to low expectations that stem from problems that may be resolved now.

Quick overview of the quarter
Results were good, but guidance was light. eBay's revenue of $4.4 billion was in line with consensus, and earnings per share of $0.69 was a penny ahead of expectations. Guidance for the coming quarter was $0.05, lighter than analysts were expecting. Management didn't change expectations for the full year, indicating that the problems that occurred this quarter are fixable quickly.

The valuation greed-o-meter
Valuation is like a greed-o-meter -- and in the case of eBay, going into earnings, the stock was priced at a discount to the S&P 500.  eBay's forward price to earnings ratio was only 15.6 times out year earnings -- low when compared with the 17.4 multiple on the overall S&P. The low expectations were caused by a data breach that the company disclosed in May but occurred in February and March.

True or not, the reduction in guidance was blamed on the breach
After the disclosure, ChannelAdvisor sales checks indicated a large drop in growth on eBay's sites.  Aggregating the data, sales dropped from 14% growth in April to 11.5% in May before recovering to 12.3% in June. A 3.5 percentage point reduction in growth may not seem like much on the surface, but that is 25% of the total.  

On top of the data breach, a report from Marketing Land showed that eBay had lost 50% of its SEO visibility around the time that Google made a search algorithm change meant to weed out poor SEO practices. The combination of these two blows was like a 1, 2 punch to eBay's quarter, but other companies may not have felt the same effect.  Amazon.com's (NASDAQ: AMZN  ) sales growth rate for May, quoted by ChannelAdvisor, remained a healthy 28%.  Coincidentally, though, it also accelerated by more than 20% going into June, an increase similar to eBay's results.

Sandbagging the September quarter
In short, eBay was up in the after hours post reporting, and even on Friday, because professional investors were expecting a big miss and the causes appear to be already resolved. If the two problems, the data breach and Google's algorithm change were the cause of the weak guidance, they could be easily resolved -- if the fix isn't in already. This makes it possible, if not likely, that management is deliberately setting expectations low to beat results in the September quarter. 

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3033024, ~/Articles/ArticleHandler.aspx, 9/19/2014 5:59:45 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 8 hours ago Sponsored by:
DOW 17,265.99 109.14 0.64%
S&P 500 2,011.36 9.79 0.49%
NASD 4,593.43 31.24 0.68%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/18/2014 4:00 PM
EBAY $52.70 Up +0.75 +1.44%
eBay CAPS Rating: ****
AMZN $325.00 Up +1.00 +0.31%
Amazon.com CAPS Rating: ***

Advertisement