I’m always on the lookout for interesting stock charts. And just over a month ago, I showed you one that looked very interesting – US-listed technology company eBay…
eBay: three-year stock chart
(Source: Digital Look)
What, exactly makes this chart so exciting? In a word: order.
This was the chart I published about a month ago. Notice the order within the three rather neat trading ranges. And where there’s order, there’s often a profitable trade. I’ll show you why today.
eBay re-tests its upper range
Looking at where the stock price was at the time, there seemed to be a rather tempting trade on offer. Buy at $51, the lower end of the range, wait for the stock to reach back up to its $56 upper range and cash in. Bear in mind, I suggested a $49 stop loss in case I was wrong!
(Source: Digital Look)
Lots of people regularly trade these sorts of opportunities. I mean, if you can make 10% in the matter of just a few weeks, then why not?
Now, I must confess, this isn’t my cup of tea. I’m a bit more of a long-term investor. But the point is, even as a long-term investor, you can use simple charts like this to help time your purchases. In this case, buying at the bottom of a trading range can save 10% on the in-price. Not to be sniffed at.
And as I say, I wouldn’t even have been looking at the chart if it weren’t for the fact that I’m bullish on eBay anyway. I put forward ten reasons why I’m bullish last time – a good entry point was but one.
And news out last week re-confirmed that this stock is still a great buying opportunity.
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eBay is in a different league now
eBay is much better considered as two distinct businesses. First, there’s the well-known online sales business, catering for both auctions and conventional retail. But to my mind, the more important side of the business is the payment fulfilment service.
Most online shoppers are familiar with eBay’s PayPal – a payment system that allows users to make secure transactions, without having to incessantly re-input all bank card and contact details.
This side of the business is now generating 43% of eBay’s revenue. Yes, eBay’s retail business is fantastically successful, but it’s fascinating to see that the payments system is now nearly generating just as much revenue – and it’s growing quickly!
The thing is that PayPal plans to broaden its horizons. To take on the big banks, it needs to have a ‘universal’ payment system. It has to offer customers without a PayPal account a transaction service, and it has to beef up its operations in the rapidly growing mobile commerce market.
And that’s why last week, eBay announced its takeover of online payment platform Braintree in an $800m deal.
Braintree is in the technology sweet spot. This year it’s set to process $12bn of transactions – a third of which is via mobile devices. That’s a massive figure; yet, the business only employs 180 staff. It just shows how innovative technology can drive a massive business, even through a rather modest operational hub. This sort of innovation is hard for large operators like PayPal to achieve.
But eBay isn’t proud. If your competitor is too good – then just buy it!
And this is a marriage that works from both sides. eBay gets technology and an innovation drive from Braintree, while, as PayPal’s David Marcus points out, Braintree gets support in “regulatory and logistical hurdles”. And that’s something Braintree will need as its operations expand.
There is a massive battle ahead
This acquisition shows where eBay is focusing its attentions. And that is payment fulfilment.
Taking on the banking establishment is a massive battle, and it won’t be won in day; not even in a year or two. But eBay is moving in the right direction.
I think there are exciting times ahead for this business. Risks? Yes, there are plenty! Technology businesses are always wide open to the dreaded ‘creative destruction’. Competitors often appear seemingly out of nowhere and snatch market share. And you can’t simply buy-up every competitor! Also be aware that trading on 24 times 2013 forecast earnings, the stock isn’t exactly cheap.
But the way I see it, eBay is a colossus. It’s moving in the right direction and it has a decent bit of momentum behind it now. And if the stock forecasters are right, then you’re only paying 17.4 times 2015 earnings. Better still, if the stock trades back down towards the lower end of its range – that is $51, and you can get it at that price, then the price/earnings (p/e) would be a much more respectable 16 times 2015 earnings.
The stock trades on Nasdaq, and was trading at $55.97 at yesterday’s close.
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