January 14, 2013 at 04:00 AM EST
New Trade: Long eBay (EBAY) & Short Demand Media (DMD)
Last week, I was able to publish my 2013 Tech Stock rankings which certainly generated a lot of comments and feedback! I also opened my first trade, going long Apple (AAPL) against Blue Nile (NILE) which is currently up 7%, not bad! But I’m obviously not going to get carried away with a few trades, [...]

Last week, I was able to publish my 2013 Tech Stock rankings which certainly generated a lot of comments and feedback! I also opened my first trade, going long Apple (AAPL) against Blue Nile (NILE) which is currently up 7%, not bad! But I’m obviously not going to get carried away with a few trades, it’s a long year that’s just getting started! Today, I am opening a new trade, one that I hesitated doing. Why? Because one of the stocks is reporting earnings this week, a period where I ideally stay away (too much volatility and it feels like I’m playing roulette). That being said, I believe it’s a great opportunity, the best one I could find right now so here we go. Let’s start off with the numbers for both stocks:

TickerNamePricePE RatioPE Next YearReturn YTDSales GrowthAnalyst ratingBook ValueBeta
EBAYeBay Inc53.725.9819.183.9327.254.3215.391.26
DMDDemand Media Inc9.34N/A19.771.0828.443.475.441.07

Long eBay (EBAY)

In general, I’ve been a believer in eBay over the years, thanks mainly to its Paypal unit which has done extremely well. I think it’s fair to say that eBay is now doing another thing extremely well; moving to mobile. In a new world where mobile is king, it’s safe to say that eBay has adapted extremely well. I’m very curious to see what numbers will look like for the holiday season where more shoppers than ever before turned online to do their shopping. I do expect the company to continue showing strong growth and seeing its P/E ratio so close to Demand Media (DMD) screams opportunity to me.

Short Demand Media (DMD)

Clearly, I’ve been wrong on Demand Media in the past. That being said, the stock is far from out of the woods and will require significant top and bottom line growth if it wants to justify its high P/E ratio. The fact is that Demand Media is a fairly easy to understand company .It creates web content for which it sells advertising. I just don’t see how it will be able to keep growing its business steadily when it depends so much on Google and others to bring traffic. I’m not saying it’s impossible but from all of the data that I’m using, it seems unlikely making the potential upside of this trade significant. Traffic estimations are always difficult to rely on but if I add up everything, in a difficult ad context, it’s not easy for me to see how they could end up having much upside surprise.

Disclaimer: No positions on EBAY or DMD

 

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