Is e-Commerce in Trouble?

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Investors have likely noticed a troubling trend among recent earnings reports from a batch of major e-commerce companies. Disappointing revenue and earnings numbers have afflicted many of the industry players in recent weeks, including eBay (NASDAQ: EBAY  ) and  (NASDAQ: OSTK  ) . Both stocks got hit hard after releasing results, but fortunately, industry giant (NASDAQ: AMZN  ) followed with a report that pleased the market.

In the case of eBay and Overstock, these two companies produced strong results on many of the metrics that are important to their businesses. But unfortunately for investors, their soaring share prices over the past year created soaring expectations. For Amazon's part, the company's price should give investors pause considering its lack of profits. The question now is, do any of these stocks represent good buys at their current levels?

The perils of heightened expectations
On the surface, there didn't seem to be anything terribly wrong with what eBay and Overstock had to say about their respective companies. Underlying business conditions seem to be improving both on a quarter-over-quarter basis and from a year-over-year perspective. Both companies are growing, and yet, the market was thoroughly unimpressed. So, what gives?

Unfortunately, both eBay and Overstock succumbed to what afflicts many high-flying technology stocks. Simply, their underlying growth couldn't keep up with the rising expectations of the market. Prior to their earnings announcements, both stocks had registered strong gains over the past year. At the beginning of October, eBay was up nearly 20% from the prior 52 weeks. Overstock's performance was even more impressive, it quadrupled going from $8 per share in August 2012 to $35 per share as recently as a couple months ago.

To be sure, this isn't a case of an underlying business deteriorating. eBay booked revenue and non-GAAP earnings-per-share growth of 14% and 17%, respectively, and it generated more than $1 billion in free cash flow, up 28% year over year. In particular, PayPal continued to be a major source of strength for eBay and is its best asset.

Metrics across the board showed PayPal's strength: revenue increased 19%, total payment volume grew 25%, and the service ended the quarter with 5 million additional active accounts. Looking ahead, eBay projects another solid performance in the fourth quarter, with 14% year-over-year earnings growth, the midpoint of its guidance.

Meanwhile, Overstock grew revenue by 18% and diluted EPS by 27%. In addition, the company's margins expanded, which is a great sign for a technology company. Overstock earned a 19.6% gross margin during the quarter, representing a 140 basis-point increase. Unfortunately, this didn't stop its shares from getting pummeled. In all, the market shaved 12% off the company's value in the aftermath of its quarterly report.

The industry heavyweight weighs in
In the wake of disappointing results from eBay and Overstock, all eyes quickly turned to online retail juggernaut Amazon, whose own results bucked the industry trend.

Amazon's numbers blew past estimates, with quarterly revenue soaring 24%. Of course, it's worth noting that Amazon still couldn't turn a profit, despite generating more than $17 billion in net sales during the quarter. Still, shares of Amazon rocketed nearly 10% higher after the company's announcement, buoying spirits that not all e-commerce companies are struggling.

The Foolish takeaway
In times like these, you're reminded that a rising stock price foretells rising expectations. However, before you hit the sell button, it's useful to recall the old investing adage: Buy when there's blood in the streets. While Amazon's shares are undoubtedly on a tear, I personally consider the stock to be trading at too high a price, considering its lack of consistent profitability.

On the other hand, I view eBay and Overstock as better bets because they've demonstrated profitability and their P/E ratios are much more reasonable thanks to their falling share prices. As a result, you are getting more advantageous buying opportunities, and Foolish investors should add eBay and Overstock to their watch lists.

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  • Report this Comment On October 28, 2013, at 9:53 PM, NobodysFool2011 wrote:

    First thing to remember. Amazon is actually a retailer, they have inventory, warehouses, infrastructure, products (ie: Kindle) etc while eBay is only a website. eBay has no inventory, they do not sell merchandise, do not have warehouses and they only thing they do is attach themselves to merchants and suck out profits. eBay has very little overhead, so it is very easy to be profitable compared to Amazon.

    That's where the comparisons end. Where Amazon is killing eBay is with customer service and customer loyalty. Ask 10 people what they think of eBay and 8 out of 10 will say it's full of scammers and Chinese made junk. eBay / Paypal have one of the worst reputations of any company in America. A couple of Google searches will back that claim up.

    In commerce, reputation is king. eBay wears the tarnished crown of a deposed dictator and it's only getting worse with every myopic change implemented by CEO John "Ding Dong" Donahoe and his team of corporate buffoons.

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