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Mixed eBay Earnings Put These ETFs in Focus

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The e-commerce behemoth eBay Inc (EBAY) came out with Q2 results after the closing bell on July 16. Though the company fell short of the Zacks Consensus Estimate on top line, investors should see some hope in the strong earnings outlook.

Adjusted earnings per share came in at $0.69 per share, better than the year-ago level of $0.63. Revenues of $4.37 billion also fell shy of the estimate of $4.38 billion but grew 13% year over year. Revenues were primarily volume-driven.
eBay's Pay Pal business put up a good show in the quarter with a 15% gain in active registered accounts.  Another segment – Marketplaces – generating revenues from the sale of goods available on eBay properties – witnessed a 14% surge in new buyers. Net revenues from payments surged 20%.
However, on the margin front, the e-commerce giant clearly dragged. The pro forma gross margin fell 63 bps year over year.  The take rate too was down annually.
Mixed Guidance

While the story so far was mixed, the company maintained the same tone on the guidance front. The company guided non-GAAP earnings in the range of $0.65 to $0.67 per share, which is way above the Zacks Consensus Estimate of $0.60. 
However, management expects third-quarter 2014 revenues of $4.30–$4.40 billion which is below the consensus expectation of $4.42 billion. The company maintained its earnings guidance for 2014 though it reduced the upper limit of the revenue guidance.

Market Impact

As expected, thanks to a mixed report, eBay shares did not rise following the release, but did not fall either. This gives a cue that investors might be taking interest in eBay’s efforts to boost its business.
The stock gained 1.54% (as of July 18, 2014) in the two days post earnings. The results have put some ETFs with considerable exposure in eBay in focus that have been highlighted below (read: Guide to Internet ETFs ):    

PowerShares Nasdaq Internet Portfolio (PNQI)

This fund follows the Nasdaq Internet Index, giving investors exposure to the broad Internet industry. The fund holds about 99 stocks in its basket with AUM of $322.6 million while charging 60 bps in fees per year (read: ETFs to Buy on Netflix Rise Following Goldman Upgrade).

The in-focus eBay occupies the eighth position with a 3.88% allocation. In terms of industrial exposure, Internet software and services make up for more than two-thirds of the basket, followed by Internet retail. PNQI has lost nearly 1.42% so far this year and but gained 0.54% last week. The fund currently has a Zacks ETF Rank of 3 or 'Hold' rating with a 'High' risk outlook.

First Trust Dow Jones Internet Index (FDN)

This is one of the most popular and liquid ETFs in the broad tech space with AUM of over $1.68 billion and average daily volume of more than 650,000 shares. The fund tracks the Dow Jones Internet Composite Index and charges 57 bps in fees per year.

In total, the fund holds 42 stocks in its basket with the in-focus eBay taking the third spot with a 6.13% share. From a sector look, information technology accounts for more than half of the portfolio while consumer discretionary makes up 25%. The ETF is down about 1.55% year to date but gained 0.27% past week. FDN has a Zacks ETF Rank of 3 or 'Hold' rating with a 'High' risk outlook.

Market Vectors Wide Moat ETF (MOAT)
This ETF follows the Morningstar Wide Moat Focus Index and provides equal-weighted exposure to 21 U.S. securities that have a unique sustainable competitive advantage in their respective industries. Here, eBay occupies the eighth position in the basket, accounting for 5.09% of total assets.
The product is pretty spread out across various sectors with financials, information technology, consumer staples and healthcare taking double-digit allocation. The fund has accumulated $758.6 million in its asset base and sees good volume of more than 100,000 shares a day. Its expense ratio comes in at 0.49%. The fund has added nearly 7.32% so far this year and 0.39% past week (as of July 18, 2014). MOAT has a Zacks ETF Rank #2 (Buy).

Bottom Line
It is certain that eBay is making efforts to achieve stability and the broader e-commerce space has room for growth. However, a rough global recovery put this high-growth space aside lately as evident by the Zacks industry rank of 'bottom 20%'. eBay itself currently carries a Zacks Rank #4 (Sell).
So, investors counting on the long-term potential in the space can consider the recent sluggishness in eBay as a buying opportunity. However, a sector approach may be better, at least until earnings estimates turn around for eBay (read: 4 ETFs to Tap on Upcoming Alibaba IPO).

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