DASH in, EBAY out - a Deep Dive Into the 2024 Implications

Following the conclusion of the Consumer Price Index report and the Federal Reserve meeting, we are approaching the last major “liquidity event” of the year: the annual reconstitution of the Nasdaq 100 Index.

In the latest annual reconstitution of the index, floundering e-commerce giant eBay Inc. (EBAY) has seen its spot given to the thriving food delivery service DoorDash, Inc. (DASH). The respective removal and addition will take effect before the commencement of trading on December 18, 2023.

Inclusion within the Nasdaq-100 Index is significant for stocks as it is a reference point for numerous financial products, encompassing options, futures, and funds. Portfolio managers, maintaining portfolios synced with the index, purchase shares in the same proportion included in the index. The addition of stocks is dictated by market capitalization and trade volume. The removal indicates a shift in favor of other companies that met these criteria more closely.

The annual reconstitution aligns with another significant trading occurrence known as triple witching, a quarterly phenomenon marking the expiration of stock options, index options, and futures.

This period provides an invaluable opportunity for the trading community to transfer substantial stock quantities during the final burst of tax loss harvesting or strategically position themselves for the coming year. There will typically be a 30%-40% decrease in trading volume in the year's last two weeks post-triple witching, with noteworthy volume largely limited to the final trading day.

While all this may seem of mere scholarly curiosity, the recent surge in passive index investing over the past two decades has heightened the importance of these events to investors.

Adjustments to these indexes, whether through additions or deletions, share count alterations, or changes in weightings to lower the dominance of large companies, initiate substantial monetary transfers into and out of mutual funds and ETFs directly or indirectly associated with these indexes.

Invesco QQQ Trust (QQQ) is emblematic of these changes due to its strategic linking with the Nasdaq-100, which lists the 100 largest nonfinancial companies on the Nasdaq. The QQQ fund ranks as the fifth-largest ETF, overseeing approximately $220 billion in managed assets.

Given this backdrop, let’s delve into an in-depth analysis of DASH and EBAY stocks and find out what’s in store for them in 2024.

DoorDash, Inc. (DASH)

DASH, a prominent American food delivery provider, has recently garnered attention for various developments attracting investor interest. A key factor is a surge in the company's share value following an impressive earnings report, largely fueled by its deliberate extension beyond customary restaurant delivery services.

The ongoing favorable momentum has been additionally strengthened by the release that DASH is set to feature on the Nasdaq-100 Index. This indicates the company’s burgeoning prominence and fortifying position within the industry.

In the fiscal third quarter that ended September 30, 2023, the company reported a surge in revenues by 27.2% year-over-year to a whopping $2.16 billion, surpassing the consensus mark.

This considerable growth is attributed to the robust performance across total orders and Marketplace GOV, along with refined logistics efficiency and growing advertising contributions. Total orders increased 23.7% year-over-year to 543 million, while Marketplace GOV increased 23.8% from the year-ago quarter to $16.75 billion.

Looking forward to the fiscal fourth quarter ending December 2023, the company projects its Marketplace GOV to range between $17 billion and $17.4 billion. Meanwhile, the adjusted EBITDA is expected to stand between $320 million and $380 million. It is noteworthy that DASH plans significant, ongoing investments in the future as it seeks to broaden its service offerings.

After these results, DASH shares saw a rise of over 7.5% during after-hours trading, signaling investor confidence. The post-earnings rally of DASH shares bears testament to the company's financial wellness and effective strategies to diversify its revenue sources. Its deliberate shift beyond restaurants to include delivery services for groceries, alcohol, and other items has appealed to its consumer base, attracting investors along the way.

The exceeding market expectations with its earnings report indicates that the company's growth strategies produce measurable outcomes crucial to maintaining long-term investor trust.

For the fiscal fourth quarter ending December 2023, analysts anticipate its revenue to increase 24.1% year-over-year to $2.26 billion, while EPS is expected to come at $0.55.

In a rare and strategically significant decision, the firm transitioned from the NYSE to the Nasdaq in September 2023, signifying its positioning and businesses centered on innovative technology. DASH’s CFO Ravi Inukonda said, “We are delighted to join a community of leading technology companies with our transfer to Nasdaq.”

This momentous shift, further strengthened by the company's recent inclusion in the Nasdaq 100, has the potential to amplify investor trust, possibly driving increased market capitalization in forthcoming years.

The Nasdaq-100 Index, encompassing some of the most prodigious and influential entities within the technology and innovation domains, has recently acknowledged DASH's escalating prominence via its inclusion.

This inclusion is traditionally followed by a surge in the demand for the company's shares, initiated by funds tethered to the Nasdaq-100 that are now obliged to purchase stock in DASH. Historical examples corroborate the potential for such inclusion, triggering an upswing in stock prices.

This development also endorses the recognition of DASH for its stellar scalability, incessant innovation, and adeptness at market adaptation – qualities seen as ideal for corporations represented in the technology-centric benchmark. It simultaneously alludes to a transformation in market dynamics and the arrangement of the tech industry, where DASH’s operating model aligns better with extant and prospective market trajectories.

From the investors’ perspective, such an inclusion might be interpreted as a portent of persistent growth, inciting a reevaluation of their investment portfolios. The acknowledgment from Nasdaq will likely draw a more diversified range of investors, like institutional investors, potentially augmenting liquidity and raising visibility for DASH shares.

However, investors should be aware of the stark competition and the intrinsic risks inherent to the rapidly evolving delivery market, characteristic features of which comprise regulatory hurdles and the compulsory need for uninterrupted innovation.

eBay Inc. (EBAY)

EBAY is grappling with intensified competition from e-commerce contemporaries and macroeconomic hurdles. In the fiscal third quarter that ended September 30, 2023, its profit was $1.03 per share, and sales stood at $2.50 billion, aligning with analyst estimates.

Gross merchandise volume, the value of all goods sold on EBAY, increased 1.6% to $17.99 billion in the quarter, surpassing analysts’ average estimates of $17.72 billion. The company reported 132 million active buyers in the quarter, down 2.2% year-over-year. Its advertising revenue of $366 million fell short of analysts’ estimates.

EBAY's recent sales forecast for the upcoming holiday period has dispirited investors. Revenues for the current quarter are anticipated to be between $2.47 billion and $2.53 billion. Even though the figure seems healthy, it falls below the industry analysts' average projections of $2.60 billion. The company expects EPS between $1 and $1.05 in the quarter ending in December, below the analysts’ $1.05 estimate.

EBAY's gloomy revenue outlook for the traditionally profitable holiday season implies persisting struggles in maintaining customer loyalty against fierce rivalry from larger competitors. Projected U.S. online sales are expected to swell by 4.8% during the holiday period of November 1 to December 31. However, EBAY faces a steep climb in attracting consumers. To confront these obstacles, the organization intends to heighten its cost-efficiency to preserve profit margins and earnings.

The unexpected forecast shocked the financial arena, particularly unnerving EBAY investors. Following the disclosure, EBAY’s shares plummeted significantly, highlighting the extensive expectations investors harbor for the company owing to its dominant e-commerce standing.

For the fiscal fourth quarter ending December 2023, analysts anticipate its revenue to decrease marginally year-over-year to $2.51 billion, while EPS is expected to decline 4.2% year-over-year to $1.02.

Additionally, EBAY's exclusion from the Nasdaq-100 Index indicates its diminishing influence and an uncertain long-term business outlook. The removal might weigh the company's stock price, leading to diminished appeal and demand among investors who actively follow or invest in the index. Concurrently, index funds mirroring the Nasdaq-100 could divest their EBAY shares in favor of newly added stocks, thereby increasing selling pressure on EBAY.

The removal could reflect diminished market confidence in EBAY’s performance and growth trajectory, particularly when benchmarked against its e-commerce competitors.

However, this shift also presents EBAY with a unique opportunity for introspection and strategic reassessment. To secure its industry competitiveness, it becomes imperative for the company to acclimate to evolving market dynamics and align itself with investor anticipations.

Despite these potential impacts, the actual effect of this reconstitution might not be significantly detrimental or enduring, as EBAY’s infrastructural foundations and market positioning do not stand directly compromised by the reordering.

In addition, EBAY could potentially harness certain favorable factors to its advantage. These include an uptick in retail activity during the holiday season, the broadening reach of its managed payment service, and robust growth within its classifieds and advertising segments.

The Thanksgiving Rally Should Not Be Trusted

The market rally during the shortened holiday trading week of November 21st-25th should not be trusted just yet.

The Dow Jones Industrial Average rose 1.78% during the week, the S&P 500 increased by 1.53%, and the technology-heavy NASDAQ grew by 0.72%.

The move higher came for several reasons, but none materially changed the economy's outlook over the coming six to twelve months.

The biggest news was from the Federal Reserve. The Fed's meeting minutes from their November 1st and 2nd meeting pushed prices higher after several Fed members expressed interest in slowing the pace of rate hikes during future meetings.

Just the fact that the Fed is talking about reducing the amount of their rate increases is significant, and many economists applaud this move. Economists are happy with this because the Feds policy changes have a lag, meaning it takes time for rate increases to show in economic data reports.

The concern has been the Fed is raising rates too quickly, and by the time the lag sets in, the economy will be in the dumps. So, slowing the pace today is a possible way the Fed can avoid running the economy into the ground. Not running the economy into the ground is the "soft landing" we often hear about when people refer to the Fed and its current policies.

Another catalyst for the recent move higher was the Consumer Price Index in October, which was up 7.7% from a year ago. This was the lowest CPI reading increase since January of this year. But, let's be honest, a 7.7% increase year-over-year is still ridiculously high inflation.

However, many economists are actually saying they are seeing inflation leveling out. We aren't yet seeing that happen with the CPI numbers because we are still looking at year-over-year comparables before inflation got out of control.

The true sign that inflation has slowed, or is still climbing, will be in 2023 when we see year-over-year comps comparing current inflation measures with the elevated inflation we began seeing in early 2022. Continue reading "The Thanksgiving Rally Should Not Be Trusted"

Picking the Right ETF to Avoid Contango

Exchange-traded fund investors who buy and sell inverse products regularly know what contango is. But the average investor probably doesn’t understand the ins and outs of contango and how it can hurt an investment.

With a little knowledge, you can actually use contango to your advantage and profit from an investment that is actually losing value.

What is Contango?

In a nutshell, it is the cost of purchasing futures contracts, options, and derivatives. When you invest in a leveraged exchange-traded fund, in order for the fund to gain that 2X or 3X leverage, it must buy monthly futures and options contracts.

Then towards the end of the month, the fund will sell its current contracts with very near-term expiration dates and purchase the following month's contracts that have a longer expiration date. In the process of doing this, the fund will sell a lower-priced contract and then buy a higher-priced contract.

This occurs because the further out the expiration date on an options contract, the more expensive the contract will be. This is because the buyer of the contract has time on their side and the seller is taking on more risk because the value of the underlying asset has more time to make a large move.

Since the price of the further dated contracts is always more expensive than what the fund is selling their current contracts for, the fund is constantly burning money. This money burn, is called contango. The money being ‘burned’ is literally reducing the amount of money the fund has to invest and, over time, causes the price of the ETF to slowly shrink. For example: a $25 ETF will only be worth say $20 over the course of a few months, even if the underlining investments that the fund tracks stayed absolutely the same during that whole period of time.

On a one-day basis, contango isn’t usually seen or felt by investors, but over the course of a few weeks or even months, it would definitely be felt.

How to Make Contango Work For You

One method of taking advantage of this contango money burn is too ‘short’ the different ETFs that experience this phenomenon. However, shorting stocks may not be in the cards for all investors because it is risky and capital intensive, especially when you are trying to short an investment over a long period of time.

Another, slightly lower risky way and with substantially lower capital outlays, is by purchasing put options in ETFs that experience high levels of contango. Buying put options is just slightly less risky since straight shorting a stock can actually end up costing an investor more than a 100% loss.

With put options, your max pain is 100% loss. If you short a stock and the stock runs higher, you could actually lose more than 100% of your initial investment since the stock price has no cap. Options are still risky, but again just slightly less risky.

So how does that work? Let’s say you want to short the Invesco QQQ Trust (QQQ), essentially the Nasdaq index. But you don’t want to just short it, you really believe it is heading lower so you want a little leverage.

You find the ProShares UltraPro Short QQQ ETF (SQQQ). This is an ETF that is 3X short the QQQ or the Nasdaq. The SQQQ will go higher in price when the Nasdaq goes lower. However, the SQQQ experiences contango due to the way it produces its 3 times leverage.

Now the ProShares UltraPro QQQ ETF (TQQQ) is the opposite of SQQQ. It gives investors 3X leverage to the upside of the Nasdaq or the QQQs. If you have a strong conviction that the Nasdaq is heading higher, the TQQQ is for you. But once again, contango will have an effect on your TQQQ returns if you hold it for more than one day.

Your option to not only avoid contango but also to make it work for you is to buy put options contracts in the TQQQ or the SQQQ depending on which way you think the Nasdaq is going to go.

The way these work is buying put contracts on the opposite ETF than the way they are designed to move. If you think the market is heading higher, you would normally buy the TQQQ ETF. But if you want to avoid contango, you actually buy the SQQQ put options. This is because if the market goes higher, the SQQQ will lose value and at the same time contango will be lowering the price on a daily basis just slightly.

Now if you think the Nasdaq is going lower, you would buy put options on the TQQQ, since this ETF will go higher if the market goes higher and lower if the market falls.

I am just using TQQQ and SQQQ as examples, but you can do this with any leveraged ETF that is going to experience contango. Also, you need to remember, contango will only affect an ETF's price if you are holding the ETF for a period longer than one day. And even if you hold it for just a few days, the effect will not typically be noticeable. This strategy is going to produce the best results if you plan to own the put options for a few weeks or months.

Matt Thalman
INO.com Contributor
Follow me on Twitter @mthalman5513

Disclosure: This contributor did not hold a position in any investment mentioned above at the time this blog post was published, but he does buy and sell put options in the TQQQ and SQQQ ETFs from time to time. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.

Your ETFs Are At Risk If US Delist Chinese Stocks

At the beginning of January, the drama of delisting certain Chinese stocks controlled the headlines for a few days. Then, as we all know, other more newsworthy stories occurred, and we all forgot about the delisting of Chinese stocks due to 'national security' concerns.

Several different stocks were being thrown around as possibly being delisted in the future, which could affect you even if you don't own any individual Chinese stocks or Chinese-focused ETFs.

The delisting occurred as a way to 'protect' the national security of the United States against China. So, the main focus of the delisted stocks were those of military importance to the Chinese government. Most of the stocks on this list the average investors would have never heard of before. But, there were three telecommunications companies thrown on the list that some investors may have heard of. However, still very unlikely you would be holding them individually or through a non-Chinese-focused ETF.

However, two Chinese stocks, in particular, are a part of a vast number of popular ETFs in the US. The companies are JD.com (JD) and Alibaba Group Holding (BABA). For whatever reason, these two stocks were and still to an extent being considered as possible additions to the delisting list. Continue reading "Your ETFs Are At Risk If US Delist Chinese Stocks"

Now May Be The Time To Buy A FANG ETF

The phrase the FANG stocks, which was coined by CNBC’s Jim Cramer, represents five high flying technology stocks, Facebook (FB), Amazon.com (AMZN),Netflix (NFLX), and Google’s parent company Alphabet (GOOG - GOOGL). Cramer coined the phrase because how incredible these stocks where performing when compared to other technology stocks, or the market as a whole. These stocks have been market leaders for a few years, during which time we have seen their valuations go through the roof. But, the old saying on Wall Street, “stick with what’s working” has simply continued to work with the FAANG stocks. Until recently.

Facebook, Amazon.com, Netflix, and Google’s parent company Alphabet have all now reported quarterly earnings for the second quarter and while Amazon, Google, and Netflix didn’t get destroyed like Facebook, the group combined with Apple (AAPL), had lost $185 billion in market value during the last few days of trading in July. This decline had some investors wondering if the FANG rally is over, while others are considering this a good buying opportunity.

I personally am in the latter camp considering Gross Domestic Product figures came in at 4.1%, the recent job reports have all been strong, and despite some issues, mainly caused by those in Washington, all economic data indicates that the US consumer and economy is strong.

Furthermore, a strong case can be made that Facebook hurt itself regarding growth due to changes it is implementing following the data scandal back in the spring. The stock fell 19% in one day after reporting earnings. For the most part, the rest of the FANG stocks reported good quarterly earnings from most points of view, despite perhaps not topping lofty expectations set by Wall Street analysts. Continue reading "Now May Be The Time To Buy A FANG ETF"