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Will eBay disappoint earnings estimates yet again in Q3?

eBay Inc. (EBAY) is to report third-quarter 2014 results on Oct 15. Last quarter, the company had posted a negative earnings surprise of 1.72%. It is worth noting that eBay has outperformed the Zacks Consensus Estimate in two of the four preceding quarters with a positive earnings surprise average of 0.64%.

Let us see how things are shaping up for this announcement.

Factors at Play this Past Quarter

eBay’s second-quarter results saw its top line meeting the Zacks Consensus Estimate. Revenues from the Payments segment grew 5.5% sequentially, the only unit reflecting notable growth. 

Going forward, the strategic spin-off of Paypal, which is expected to see light in 2015,will not generate immediate synergies. With the spin-off, eBay will have more cash to fund its own operations instead of investing in PayPal's growth.

As spin-offs are usually a tax-free affair, investors are likely to benefit from capital gains. The development could also unlock hidden value by increasing transparency.

However, there are serious concerns for eBay. A large number of eBay customers use PayPal to process their transactions. If PayPal ends up in the hands of a rival after going public, eBay might end up losing a chunk of its customers. Moreover, Google Inc. has been making strategic moves in the online retail/payments segment that potentially increase competition for eBay.  Likewise, Apple Inc. also has the potential to encroach on its all-important Payments business. The advent of China’s e-commerce giant Alibaba in the U.S. will also likely increase competition for the company.

Notably, PayPal is responsible for roughly half of eBay’s revenues.

In another development, eBay plans to launch an in-app mobile ad network in the fourth quarter of 2014 to generate new revenue streams. In doing so, it will be joining other Internet giants like Facebook, Google and Yahoo that already offer mobile ads.

Earnings Whispers?

Our proven model does not conclusively show that eBay will beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Negative Zacks ESP: eBay has an Earnings ESP of -1.75%. This is because the Most Accurate estimate stands at 56 cents while the Zacks Consensus Estimate is pegged higher at 57 cents.

Zacks Rank: eBay has aZacks Rank #4 (Sell) which when combined with a negative ESP makes surprise prediction difficult.

We caution particularly against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Other Stocks to Consider

Here are some companies which you may consider instead, as our model shows they have the right combination of elements to post an earnings beat this quarter:

Apple Inc. (AAPL) has an earnings ESP of +3.85% and a Zacks Rank #2 (Buy)

Seagate Technology Public Limited Company (STX) has an earnings ESP of +1.60% and a Zacks Rank #3 (Hold)

Allegheny Technologies Inc. (ATI) has an earnings ESP of +40.0% and a Zacks Rank #3
 
SEAGATE TECH (STX): Free Stock Analysis Report
APPLE INC (AAPL): Free Stock Analysis Report
ALLEGHENY TECH (ATI): Free Stock Analysis Report
EBAY INC (EBAY): Free Stock Analysis Report
 
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Zacks Investment Research is characterized by a team of experts who are passionate about your investing success and is focused on sharing the same reliable investment research they would want for themselves.

Zacks Investment Research

Zacks Investment Research is characterized by a team of experts who are passionate about your investing success and is focused on sharing the same reliable investment research they would want for themselves.