Buy Yahoo! Options, Sell EBay's Before Earnings, Goldman Says
By Jeff Kearns
Sept. 27 (Bloomberg) -- Investors should use stock options to bet that shares of Yahoo! Inc. will swing more than shares of EBay Inc. after the two Internet companies report earnings next month, Goldman, Sachs & Co. said.
A strategy of buying Yahoo options and selling EBay contracts may also benefit because the price of options on EBay, the world's biggest Internet auctioneer, are ``expensive,'' derivative strategists Maria Grant and John Marshall wrote in a note. EBay is scheduled to report earnings Oct. 17.
For Yahoo, owner of the world's second-most used search engine, ``uncertainty is heightened'' before it reports results on Oct. 16 because it is developing a strategy to compete with Google Inc. and the stock tends to make bigger moves than EBay's after earnings, the strategists wrote.
``Key uncertainties are the timing of acceleration in display ad growth, the magnitude of the ramp in search growth, the levels of increased investment, and the impact of a changing business mix on the margin profile,'' Grant and Marshall wrote.
Yahoo's profit declined from a year earlier in the first two quarters of this year, while sales growth fell below 10 percent for the first time since 2002. Chief executive officer Jerry Yang said in July that he would spend 100 days improving technology and hiring engineers to regain market share from Google, owner of the most-used search engine.
Yahoo's review and earnings may increase implied volatility over the next two months, the strategists said. An increase in implied volatility, the key factor in the pricing of options, indicates traders anticipate bigger swings in the stock price.
`Solid results'
For EBay, ``business trends are more well-known and our analyst expects solid results'' and therefore less volatility, the strategists wrote in a note dated yesterday. ``EBay shares are likely to rise modestly into year end.''
Goldman equity analyst Anthony Noto rates EBay at ``buy'' and Yahoo at ``neutral.'' The New York-based analyst is top- ranked in earnings accuracy for EBay, according to Starmine.com.
Sunnyvale, California-based Yahoo shares moved an average of 9 percent on the days of its last eight quarterly earnings releases, compared with an average swing of 7 percent for EBay, according to the strategists.
San Jose, California-based EBay may report third-quarter profit before some items of 33 cents a share, the average of 21 analyst estimates compiled by Bloomberg. Analysts expect Yahoo to report earnings of 8 cents a share, the average of 17 estimates.
Investors who create and then sell options contracts are paid a premium. They are betting that the price of the option will decrease as it becomes less likely that the stock price will reach the strike price.
Next month's options contracts expire Oct. 19.
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