Why eBay, Inc. Was Up After Guiding Below Consensus

eBay guided next quarter's results below consensus this week. Why is the stock up?

Jul 18, 2014 at 3:00PM

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. 

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David Eller has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, eBay, Google (A shares), and Google (C shares). The Motley Fool owns shares of Amazon.com, eBay, Google (A shares), and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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