Amazon, eBay, or Overstock: Which Is the Best Buy?

Overstock.com (NASDAQ: OSTK  ) has had a great year with gains of 109% but remains nearly 20% off its 52-week high. With that said, Overstock recovered some of its losses last week to trade higher by 10%. Yet, does this improved performance suggest that Overstock might now be a good buying opportunity; perhaps even better than its peers Amazon.com (NASDAQ: AMZN  ) and eBay (NASDAQ: EBAY  ) ?

Three similar businesses with a niche
When you look at the business model of Overstock, Amazon, and eBay, all are relatively similar, or have the same core focus. Each operates an e-commerce business, an online store, but have certain niches that make each unique.

Overstock is by far the smallest of the three and the least diverse. The company has implemented a loyalty program, giving consumers 5%-25% rewards on products.

eBay is often called the world's largest flea market, as many of the products are sold between users. However, the company also has PayPal, which returns large profits and is the main reason that eBay has an operating margin greater than 20%.

Moreover, PayPal is the key growth driver for eBay, as its revenue increased 20% to $1.6 billion in the company's last quarter, which is far better than the 12% growth in eBay's Marketplace. As of now, PayPal is 40% of the company's total revenue, but analysts expect that PayPal will be larger than Marketplace by 2015.

Lastly, there is Amazon, and it is one of the most disruptive companies in the market, effecting retailers with its industry-low pricing. While the company is preparing to make its grand debut in the grocery business, it is Amazon Web Services that has become the company's niche.

Amazon Web Services is Amazon's cloud business, both cloud app platforms (PaaS) and cloud infrastructure (laaS), but what many don't know is that Amazon is rapidly becoming a dominant name in cloud computing. With expected growth of 55% in 2013, AWS is estimated to produce annual sales of $3.5 billion in 2013.

In addition, analysts expect that sales will grow to $8.1 billion in the next two years, thus Evercore has assigned a whopping $50 billion valuation to the business.

Boring but cheap
While Overstock may be the most boring of the three e-commerce companies, not really having anything too unique, this doesn't necessarily mean that it's the worst investment opportunity.

For one, Amazon is pretty much a lock at 20% growth, but the company is spending aggressively and showing no signs of slowing down. Therefore, it's very hard to know for certain how growth will perform once the company stops reinvesting nearly all of its operating income.

eBay is a company that's struggling to produce double-digit growth in its Marketplace. Moreover, investors have very high expectations for the company to maintain its high margins, meaning eBay can't afford to reinvest at the same rate as Amazon due to expectations; if eBay's margins fall too much, so does its stock.

This leaves Overstock, a company with trailing-12-month revenue of $1.2 billion, estimated growth of 18.5% for the full year, and 30% net earnings growth. Therefore, Overstock is growing at the same level as its peers, and with an operating margin of 1.8%, it still has room to significantly improve its profits. Not to mention, Overstock is by far the cheapest of the three.

 

Amazon

eBay

Overstock

Price/Sales

2.58

4.46

0.55

P/E Ratio

N/A

26

30.7

Forward P/E Ratio

150

17.3

23.4

Price/Operating Cash-Flow

37

15.1

12.8

As you look at the valuation metrics above, be sure to remember that P/E and forward P/E ratios might not be the best indicator of value.

These are popular among retail investors, but companies with different operating strategies might place higher levels of importance of bottom-line performance. Not to mention, net income can be tricky, as it's no secret that aggressive accounting can inflate net income.

With that said, operating income is a better reflection of potential earnings, or what a company could create in profit from operations alone. Therefore, a comparison of a company's valuation to its operating income might be a better way to determine its value, and also the amount of future profit that's possible. Clearly, Overstock is winning in this category at 12.8 times operating cash flow.

But the real metric where Overstock is golden is with its market capitalization compared to its annual sales. Remember, Overstock has a very low operating margin that is improving greatly. Therefore, a company that's cheap compared to sales can eventually produce higher profits if margins rise.

Throughout Overstock's two-year 283% return, its margins have outpaced revenue growth, and based on its valuation, there is still a significant amount of room to run higher.

Final thoughts
Overstock might not be the e-commerce market favorite; it might not be the sexiest pick; but Overstock has the best balance of growth and value within the industry.

Thus, an investor exploring this space and performing due diligence might be drawn to Amazon or eBay, but based on Overstock being five times cheaper than Amazon compared to sales and the capabilities to become more efficient, it clearly has the most upside potential.

Therefore, even with Overstock's large two-year gains, and its return last week, it's still likely that the best option to outperform the e-commerce industry in terms of stock performance is in fact Overstock. 

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  • Report this Comment On December 23, 2013, at 9:20 PM, PhilipCohen wrote:

    Certainly not eBay ...

    The only measure of a listed company’s success is its share price; Johnny Ho is now in the seventh year of his “three-year turnaround” of eBay, he’s expended a whole lot of shareholders’ funds, and still there is little sign of any improvement.

    So, what does the “smart money” on Wall Street think about Johnny Ho’s dream of converting eBay into the “Westfield Mall” of online shopping? Well, in late 2007 both eBay’s and Amazon’s stock prices were ~$40; now, with the US stock market at an all time high, eBay is still only ~$54 and Amazon is ~$403. What more telling data does anyone need to know that Johnny Ho has been an unmitigated disaster for all concerned, except for himself, of course?

    Since “Chairman Ho” arrived on the scene, eBay’s long-suffering long shareholders have, relatively speaking, been effectively going backwards—at a quite steady rate of knots—notwithstanding the nonsense that constantly spews from the eBay Dept of Spin …

    The only people making any money out of eBay are Johnny Ho and the gaggle of like-bodied headless turkeys that he has surrounded himself with, and with whom he apparently spends all day blindly running around in circles with in the eBay executive suite.

    Just how much longer are eBay’s major institutional investors going to let the Ho turkey survive with such continuing poor results and increasingly bad consumer responses in the press, about which not even all the hot air generated in the eBay Dept of Spin can counteract?

    I also have to wonder if Pierre has ever thought about just how much more fabulously wealthy he might now be had he not ok'd the handing over of the control of eBay to this incompetent, destructive, unscrupulous, narcissistic sociopath—Johnny Ho?

    Clearly, the message from the smart money on Wall Street is that eBay Inc. is a "dog" and Johnny Ho is an utterly incompetent dog handler ... bit(DOT)ly/11F2eas

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