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I've been going back and forth with readers today, discussing eBay (NASDAQ:EBAY). The stock's been a wild one. The company's holding its annual analyst meeting, which has generated a great deal of volatility today. Earlier in the meeting, company officials raised revenue growth expectations for 2002 to 50 percent. Prior to the meeting, the Street had expected low 40s sequential revenue growth for next year.

EBAY is currently a Put Play on the Option Investor play list and has been recommended as a LEAPs Put Play by the Editor of the section, Mark Phillips, who's recently written about the stock:



Some of the readers that I've exchanged e-mails with today have argued that EBAY doesn't deserve its high valuation. Indeed, EBAY is an expensive stock. The company currently trades about 175 times the trailing twelve months of earnings, and its forward-looking multiple is about 75 times next year's earnings. But, as the company guided earlier today, its growth rate, at least in revenues, should hit 50 percent next year. So, does that expected growth rate justify EBAY's current valuation?

Whether EBAY is expensive or cheap is in the eye of the beholder. Speaking of which, the top 5 institutional holders of EBAY's common control about 45 million shares, according to the most recent filing. In order of most shares held, those five include: Janus, Alger Management, AXA Financial, Amerindo, and Invesco. The aforementioned five control about 30 percent of the company's float, which is certainly enough to matter.

From what I gathered reading a few research reports and listening to interviews of analysts attending the EBAY meeting was that the sell-side community was surprised with EBAY's guidance and was, for the most part, positive on the company. In fact, one reader e-mailed in a tid-bit, saying that Merrill was bulling the stock based upon the raised guidance. However, several analyst interviews I listened to revealed that most would rather "buy the stock on a pullback" than at its current levels, implying that the stock was expensive.

Whether or not the aforementioned institutions heed what analysts say I don't know. But, if I was running big money and had a big gain in a stock like EBAY in a year when the averages had taken a beating, the I'd be willing to defend that gain for another two months. In fact, through today, EBAY is up by about 70 percent this year. That's obviously a healthy gain and worth defending.

However, if a trader can detect the point at which one or all of those institutions stop defending the stock or the point at which supply overtakes demand, he/she will probably make some decent coinage to the downside. After a brief period of relative weakness about a month ago, EBAY is currently trading "better" than both the S&P 500 (SPX.X) and Nasdaq-100 (NDX.X). A trader could watch for a shift in that dynamic to detect if/when the aforementioned institutions throw in the towel.

Eric Utley
Option Investor

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