The Sun Will Always Rise

eBay Second-Quarter Revisions

Here they are folks:

 Q2 Revenue:  $2.18 Bil

Q2 EPS (Adj):  $0.41

A strange thing happened today while I was working on these revisions.  I took a look back at the regression models I created to predict Q1 revenue.  We now know that actual revenue came in at $2.20 Bil.  Generally, the process that I employ to arrive at my revenue estimates, is to create multiple regression models and then determine which one best predicted the prior quarter’s sales.  In the case of my Q1 estimate, I decided to use two variations of first-order linear regression and one form of autoregression.  The interesting phenomenon that I previously alluded to occurred when I averaged the predictions of each of the five models that I previously created—the result was $2.195 Bil, or a difference of less than one half of a single percent from the actual Q1 revenue!  Why I did not realize this earlier is beyond me.  However, the good news is that I feel very strongly about the above Q2 revenue estimate of $2.18 Bil.  I am also confident that Q2 EPS will come in at $0.41.

Here is a table showing the Q2 revenue predictions from each of the five models I created for eBay:

Q2 Revenue Estimates
Model	Prediction
First-Order	$2,210,700
FO-CFO	$2,210,700
Deasonal	$2,203,423
Dummy	$2,193,097
Lagged	$2,098,321
Average	$2,183,248

Here are my line-by-line estimates for the second quarter:

Income Statement
Three months ended June 30, 2010
Revenue	$2,183,248
Cost of Revenue	$613,531
Gross Margin	$1,569,717
Operating Expenses:
R&D	$199,463
S&M	$462,957
G&A	$270,101
Provision for Loan Loss	$100,987
Amortization	$60,428
Restructuring	$12,000
Total	$1,105,936
Income from Operations	$463,781
Interest Income	$6,011
Income before Taxes	$469,792
Provision for Income Taxes	-$91,166
Net Income	$378,626
Shares Outstanding	1,336,000
EPS	$0.28
Net Income (Adj)	$551,626
EPS (Adj)	$0.41

So what does this mean for the investors and traders of eBay’s stock?  It means that there is a good chance that next quarter’s revenue will come in about $0.02 higher than the upper range of management's forecast.  However, as we all know, the whisper numbers are what really move stocks after earnings, and I would not be surprised if the market factors in an EPS of $0.41 by the next earnings announcement.  Similarly, when I reworked my valuation model, I came up with virtually the same price target—$23.11.  Now, I’ve given the readers a lot of information here so let me sum it all up with a buy/hold/sell recommendation.  Given that the market has already factored in a 6% correction since the earnings announcement, I am reaffirming my HOLD recommendation.  This concludes my analysis of eBay.

I still hope to have the estimates for Texas Instruments up over the weekend.  The company will report earnings after the bell on Monday. 

If you like what you’ve been reading over the past few weeks, I implore you to click “FOLLOW” in the upper-right portion of your screen.  Similarly, I always encourage my readers to leave me a comment (even anonymously) anytime they have something to say.

P.S.  Don’t forget that the day before eBay reported earnings, I wrote a post entitled “The Future Appears Cloudy for eBay.”  If you had heeded this warning, you could have either sold your long shares or shorted the stock. 

EBAY Ownership

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Disclaimer:
· Opinions, estimates and projections contained in this report are of the author as of the date published and are subject to change without notice.
· This report is not, nor should it be construed as, an offer to sell or solicitation of an offer to buy any securities.
· Unless otherwise noted, all research reports provide information of a general nature and do not address the circumstances of any particular investor.