Saturday, September 6, 2008

Amazon vs. Ebay: Analysis for internet companies.

Pair trading is especially suitable approach if you are not sure if the market will go down or up. But you are "sure" about the valuation of stocks pair from the same sector. Sell the outperforming stock and buy the underperforming one. I have already posted pair trading analysis Intel vs. AMD and this time this is my next analysis for technology stocks pair.

The biggest online marketplaces are Amazon (AMZN) and (EBAY). Another great play for spread betting.

I will start with global picture and the trend. Ebay has started the business as a pure online auction portal where Amazon is running direct sales model, kind of "buy it now". Amazon is the king in fixed-price listing and Ebay is moving into this direction. The latest Ebay's Gross Merchandise Volume [GMV] shows increase 8%, well behind previous 4 quarters (12-14%). And sluggish core auction business is the main reason why this is forth year with negative return on Ebay's share price. In addition to that Ebay had been punished for Skype writedowns and unsuccessful integration. On the other hand these secondary business units post significant revenue growth more than 30% for PayPal and more than 60% for Skype.

Ebay made recently changes in fee structure. If we look at the item below $25, Ebay has commission 8% and Amazon 15%. But Amazon listings last longer and does't charge fee for unsold items unlike Ebay.

Amazon has double total sales (17.13 bln USD) compared to Ebay (8.46 bln USD) but total income is almost the same 588 mil. resp. 515 mil. This brings better profit margin for Ebay with 6.09% vs. Amazon with 3.47%. But the trend for profit margin is improving for Amazon (sales vs income growth; 39% vs 59%) and stays unchanged for Ebay (21% vs 22%).

Ebay share price is currently traded at 11 times cash flow compared to Amazon price with 30 P/CF ratio. I do believe that downtrend is over and Ebay is now good value stock for short term investment. It looks cheaper than Amazon. Nevertheless long term prospect seems to be better still for Amazon.

Disclosure: Author doesn't own any shares of Ebay or Amazon.


2 Responses to "Amazon vs. Ebay: Analysis for internet companies."

five_whys said... September 8, 2008 at 4:06 AM

this simple analysis seems to be a good starting point.. however, there is nothing that compares two company's business models and trends thereof.. if ebay's business model is changing, what is the impact of that?

Vlada, Czech Republic said... September 8, 2008 at 4:50 AM

Ebay model is changing but still no sign of improvement, that's why long term position stay unclear. The point of analysis is to highlight fundamental valuation which currently better that for Amazon.