eBay Inc (EBAY) Q1 Earnings Preview: Cost of Revenue Limiting EPS Upside

eBay Inc (NASDAQ:EBAY) will publish first quarter 2014 financial results after the market closes on Tuesday, April 29, 2014. On the same day, management plans to hold a conference call and simultaneous webcast to discuss its financial results for the first quarter 2014 at 2:00 p.m. Pacific Time.

Wall Street anticipates that the online auction site will earn $0.67 per share for the quarter, which is $0.04 more than last year’s profit of $0.63 per share. iStock expects eBay to hit Wall Street’s consensus number. The iEstimate is $0.67, too.

Sales, like earnings, are expected to increase, rising 12.7% year-over-year (YoY). eBay’s consensus revenue estimate for Q1 is $4.23 billion, more than last year’s $3.75 billion.

eBay provides online platforms, tools, and services to help individuals and merchants in online and mobile commerce and payments in the United States and internationally. The company operates eBay.com, StubHub, Fashion, Motors, Half.com and PayPal, in case you didn’t know.

When iStock thinks of eBay, we think high flyer, but the internet service provider’s earnings results have been anything high flying. In the past four year, eBay has delivered 12 bullish surprises and four on-target results; no misses –yeah! However, results tend to hug the consensus view. On average, the NASDAQ member tops expectations by $0.02 with a bullish surprise range of $0.01 to $0.05.

April has been the toughest quarter for the company as the diamond month accounts for two of the four on-target announcements.

For the most part, investors trading on upcoming events, most notably earnings, are more interested in the stock’s earnings-driven price sensitivity. As always, there is some good – mostly good, in fact – and some bad for investors to contemplate.

eBay’s price increased in the three days surrounding the quarterly check-up 11 of the last 16 announcements – that’s good. Typically, shares lift by 5.73% with a max of 10.7% and a min of 0.9% when the reaction is green.

Meanwhile, shares experienced a red response five of the last 16 profit announcements. eBay lost anywhere from -3.9% to -9.9% with an average loss of -7.2%. That’s bad enough, but April has been worse. Again, Q1 is over-represented in the loss column, accounting for a two of the five downdrafts, losing -6.7% and owning the biggest loser title, dropping the max- 9.9%. Now, we go to worse eBay’s price lost ground for the past three quarters in a row.

When we see a tight relationship between the consensus estimate and actual, reported EPS, it’s been our experience that the magnitude of the surprise depends on margins. We do find some concerns based on 2013’s annual report.

According to the income statement, cost of net revenue increased in real terms and as a percentage of revenue. For the year, the line-item grew 19.45% versus 14.03% revenue growth, which gobbled up 31.38% of sales in 2013 compared to 29.97% in 2012. It was the only line-item that was out of whack, in our opinion.

Although it might not sound like much, the difference was $228 million in 2014, which works out to almost $0.18 less per share in earnings for the year. That’s a big difference.

Overall: eBay Inc (NASDAQ:EBAY) history, seasonal results, and iEstimate suggest an announcement that doesn’t stray too far from Wall Street’s outlook. However, if management can reign in cost of net revenue, there would be plenty of wiggle room for EPS to surprise us.