Today’s large, unusual options activity in eBay Inc. (EBAY) highlights the underlying value of EBAY stock. It is trading 11% higher today and a tranche of out-of-the-money put options is 23 times the prior contracts outstanding.

EBAY is over $70.00 in midday trading after Meta Platforms (META) announced that it will allow buyers in the U.S., Germany, and France to browse listings from eBay directly on Facebook Marketplace while completing their transactions on eBay.

This will likely drive people to buy and sell on eBay and could significantly increase its revenue and free cash flow (FCF).

Here is what Meta said about the effect this will have on eBay:

As a result, the underlying value of EBAY stock is likely to be higher. This has led investors to push EBAY stock up 11% today.

Unusual Put Options Trading

Moreover, a large tranche of out-of-the-money EBAY puts are now trading, as seen in a Barchart Unusual Stock Options Activity Report today:

This is for puts that expire on Jan. 17, 2025, at the $67.50 strike price. These puts are below the $70 trading price and have a 57-cent bid-side premium.

That means that the buyers of these puts expect EBAY will fall below $67.00 on or before Jan. 17 in the next 9 days. The short sellers of these puts can immediately earn a 0.844% short-put yield (i.e., $0.67/$67.50).

The bottom line is that even if the stock falls to $67.50, the short sellers will have a breakeven price of $66.93.

This large, unusual volume of options highlights the underlying value of EBAY stock. Let’s examine that.

Strong FCF and FCF Margins

eBay reported on Oct. 30 that its Q3 revenue rose 3% and its free cash flow (FCF) was $646 million, representing a 25% margin on its $2.576 billion revenue. That was significantly higher than the prior quarter’s 11% FCF margin, although slightly lower than last year’s 31% margin.

Over the past 12 months ending Sept. 30, eBay produced $1.39 billion in FCF on $10.266 billion in revenue. That works out to a 13.6% FCF margin.

Up until today’s Meta announcement analysts forecast that 2025 sales would rise 3.1% from $10.28 billion this year to $10.6 billion. After today’s announcement, if analysts now raise their revenue forecasts to 5% growth or so, 2025 revenue could hit $10.8 billion.

As a result, assuming eBay generates 20% FCF margins, its FCF could rise over $2 billion:

$10.8b forecast revenue x 0.20 FCF margin = $2.056 billion FCF

FCF to Fund Buybacks

So, no wonder the company recently announced it would raise its share repurchases by $3.0 billion. Last quarter alone it did $755 million and $2.2 billion over the nine months to Sept. 30. 

For example, if it takes 1.25 years to fulfill that share buyback, this implies its annual buybacks will be $2.4 billion.

In other words, eBay is extremely confident it can afford to pay dividends and do $2.4 billion or more in buybacks.

That also implies that EBAY stock is worth much more.

EBAY Stock Target Price

One way to value EBAY stock is to use the higher FCF forecast, assuming that 100% of the FCF will be paid out in dividends and buybacks. As a result, we can back out what its dividend/buyback yield will be. 

For example, using a 5.0% FCF yield metric, EBAY stock could be worth over $41 billion:

$2.056b FCF / 0.05 = $41.12 billion

Today its market cap is $33.59 billion after the 11% gain. That means EBAY stock is still worth +22% more:

$41.12b / $33.59b = 1.224 = +22.4% higher mkt cap

In other words, EBAY stock’s target price is $85.84 per share.

So, no wonder some investors are willing to take advantage of today’s announcement and trade in EBAY options. The short sellers of these puts, in particular, are willing to take the risk that EBAY will stay over $67.50 over the next 9 days. 

Even if it falls, they see an upside in owning EBAY even at a price of just below $67.00 per share. The bottom line is that with today’s announcement, along with the company’s strong free cash flow, EBAY stock looks undervalued.

On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.

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