/EBay%20Inc_%20logo%20by-%20JHVEPhoto%20via%20iStock.jpg)
Ebay Inc (EBAY) stock is trading well off its highs, attracting huge unusual call options activity today. This could be due to call options buyers or covered call sellers, both showing bullish sentiment in the stock.
EBAY is at $65.19, down from a recent peak of over $70 per share. Today's Barchart Unusual Stock Options Activity Report shows that over 16,880 call options contracts were traded for expiration on Friday, March 14.
That represents over 53 times the normal, prior outstanding number of contracts outstanding in this call option tranche.
Bullish Outlook on EBAY
Moreover, the strike price was $67.00, or just 2.8% higher than today's trading price. This means that sellers of these calls believe EBAY will stay below $67.00 in the next two days, and buyers believe that it end up higher.
For example, the asking price of just 19 cents implies that the breakeven for the call option buyers is $67.19, or just 2.9% higher than today. In addition, any covered call sellers of these calls receive 17 cents or a yield of 0.26%.
That works out to a monthly yield of 3.9%, assuming it could repeated every 2 days for a month. This again, is a bullish sign, as it implies a very good expected return (ER) for covered call sellers.
Naked short sellers of these calls hope to see EBAY stay below $67.00. Any price above that implies that they will have to buy shares and $67.00 and they could have an unrealized loss if EBAY stays higher than a $67.17 breakeven price.
As a result, this seems to imply that investors in these calls are bullish on EBAY stock.
EBAY Price Targets Higher
After all, analysts are fairly bullish on EBAY stock. For example, AnaChart.com reports that 26 analysts have an average price target of $69.84 per share. That is about 6.9% higher than today's price.
Moreover, EBAY reported on Feb. 26 that it produced strong free cash flow (FCF) in Q4. The $560 million in FCF it generated represented 21.7% of its $2.579 billion in revenue. Moreover, its $2.0 billion in FCF for all of 2024 was 19.4% of its $10.4 billion in annual revenue.
That implies that its FCF margins are improving. As a result, analysts' forecasts of $10.51 billion in sales this year could imply a 14% increase in FCF:
$10.51 b sales x 0.217 FCF margin = $2.28 bFCF
$2.28 b FCF 2025 / $2.0 b 2024 = 1.14
This could push the value of its stock higher. For example, using a 6.0% FCF yield metric, EBAY could be worth 24.5% more. Here's how that works out:
$2.28b FCF est 2025 / 0.06 FCF yield = $38 billion market cap
$38 b mkt cap/ $30.5 mkt cap today = 1.245 = +24.5% upside
This implies that EBAY stock could be worth 24.5% more, or $81.28 per share
Moreover, just to be conservative, using a 6.5% FCF yield metric (i.e., equal to 15.38x FCF), it could be worth 15% more:
$2.28 b / 0.065 = $35.08b mkt cap
$35.08b / 30.5b today = 1.15 = +15% upside
That gives us a conservative price target of $75.00 per share.
So, no wonder there is so much call options activity today in EBAY stock. It looks deeply undervalued, both based on analysts' price targets, and also based on its FCF margins and a conservative FCF yield valuation measure.
