3 Reasons Amazon Wishes It Were eBay

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It might be hard for some to believe that (NASDAQ: AMZN  ) and its huge growth and seemingly world dominating aspirations could hope to be any other company. However, it's hard to look at eBay (NASDAQ: EBAY  ) and not wonder if Jeff Bezos envies what he sees. In fact, if we look at eBay's last earnings report, there are at least three reasons to believe Amazon wishes it were eBay.

Fast growth at a relatively cheaper price
It's pretty easy to compare Amazon to a company like Best Buy (NYSE: BBY  ) and argue that Amazon is the superior operation. Given that Amazon reported 20% sales growth in its most recent quarter, whereas Best Buy reported sales were down nearly 3% over the holidays, the comparison is stark indeed.

Growth investors would argue that Amazon deserves a premium valuation to Best Buy. However, if we look at eBay compared to Amazon, the argument for the Amazon premium is a little harder to swallow.

Amazon grew its sales 20% annually whereas eBay's revenue increased by 13% compared to last year. Some might assume that Amazon is the clear winner. However, eBay's business is very different from Amazon. eBay connects buyers and sellers but doesn't sell the goods itself.

A better comparison might be eBay's "enabled commerce" growth which increased 22% versus last year. Since eBay ultimately is in the business of enabling commerce, this 22% growth rate is very similar to Amazon's sales growth. The difference is, using projected earnings, Amazon sells for a forward P/E that is nearly 10 times that of eBay. With similar commerce growth, it seems either eBay is undervalued or Amazon is being overvalued; either way, Amazon should wish it were eBay.

Upwardly mobile
It's rare to read an earnings report about a technology or retail company and not have some discussion about online or mobile sales. We already know that Amazon and eBay are growing quickly, but the comparison with Best Buy's online sales is becoming more difficult.

A year ago, Best Buy's online sales only increased 10% and neither eBay nor Amazon had anything to worry about. However, over the nine week holiday season, Best Buy indicated that online sales jumped more than 23%. The difference is, where Amazon and Best Buy do very well with online sales, the second reason Amazon might wish it were eBay is eBay absolutely owns mobile sales.

In fact, eBay said that 40% of its new users came from mobile, and that mobile commerce grew by 88%. While Amazon and Best Buy don't break down what percentage of their sales are on mobile devices, there is one thing that eBay offers investors that neither of these peers can match.

PayPal is now 40% of eBay's revenue stream. For those who believe this is nothing more than an additional eBay service, consider that PayPal's off eBay mobile payments jumped 128% on a year-over-year basis. With customers obviously trusting PayPal outside of the eBay universe, Amazon wishes it had this weapon in its arsenal.

Flashing the cash
The third reason Amazon might wish it were eBay, is the latter's business model is built to generate cash flow. While Best Buy struggles to compete, the company still managed to generate $344 million in core free cash flow (net income + depreciation-capital expenditures) in the last nine months. However, it took just over $28 billion in sales to produce this result, meaning that Best Buy generated only $0.01 in free cash flow from each dollar of sales.

In the current quarter, Amazon produced $322 million in core free cash flow. Though Amazon produced almost as much free cash flow in three months as it took Best Buy nine months to generate, it also required a similar level of sales ($25.6 billion) from Amazon. In the end, Amazon kept about $0.01 in free cash flow from each dollar of sales as well.

eBay is playing in a different league than its peers. In the last three months, eBay generated over $900 million in free cash flow on just $4.5 billion in revenue. With the company producing about $0.20 of free cash flow for every dollar of sales, eBay's cash flow is superior in every way.

Given eBay's strong mobile growth, significant enabled commerce growth, and huge free cash flow, investors would be right to wish this stock were in their portfolio. Though eBay and Amazon are very different businesses, I'm sure Amazon wishes it were eBay from time to time.

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Read/Post Comments (4) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 11, 2014, at 2:56 PM, NobodysFool2011 wrote:

    eBay has no inventory, no infrastructure, no innovation and no customer loyalty. eBay and Paypal's business are based on skimming fees from third party merchant transactions. Paypal is propped up by being forced on all eBay users as the only way to pay for purchases on eBay. It's an two fisted extortion racket (and the treat their customers no better than Louie the loan shark does).

    As for mobile growth, it doesn't take a genius to figure it's a platform shift. So people are using their iPads and Droid phones with the eBay app instead of their laptop or desktop PC. You might as well try saying, "there's 40% growth in consumers using Windows 8.1 instead of XP" as a metric.

  • Report this Comment On February 11, 2014, at 10:22 PM, Eugenesz wrote:

    Thank you! Ebay is absolutely the superior company in terms of fundamentals and fair value. The problem with Amazon is that its trying to be too many things at once, it wants to be Wal-Mart, Netflix, Apple and to an extent IBM. But its juggling all these sectors while not making a single dime of earnings, and investors are just to have faith that in the "future" it will dominate all those areas.

    Although online has changed the way people shop, brick and mortars will still be around in 20 years. People still go to the grocery and you know what is faster than 1 or 2 day shipping how bout 20 minute shipping with price match at Best Buy? With Amazon hoarding a huge amount of physical inventory and paying for the logistics of that, that burns a huge hole in their revenue.

    I believe in Ebay's model is more effective and hugely more profitable, because it is focusing on commerce and how to streamline and make transcations more seamless and quick. Connecting consumers and buyers with each other all around the world empowers both parties. It isn't trying to hoard every single item under some massive warehouse, its not trying to sell/stream media like Netflix and its staying completely out of hardware leaving that to Apple and Samsung.

  • Report this Comment On February 12, 2014, at 9:26 AM, Rippenbocker wrote:

    NobodysFool2011 - Amazon is essentially doing the same thing now, look up any item and look at all the 3rd party vendor offerings. You are going to see this more and more as companies attempt to cut costs by sourcing directly from vendors and 3rd party suppliers.

  • Report this Comment On February 12, 2014, at 1:41 PM, NobodysFool2011 wrote:

    @Rippenbocker - I'm well aware Amazon has had third party merchants for several years now. Point is, Amazon is a merchant. The company was founded by Bezos as an online bookstore. They understand e-commerce firsthand, not in an aggregate manner.

    On the other hand, eBay was founded as an peer to peer auction site where individuals could trade their vintage and used items. In this respect, eBay has lost sight of their origin and have been trying desperately and unsuccessfully to become more Amazon-like instead of bettering what made them unique.

    The problem with a marketplace based solely on third party merchants is that there is no viable way to instill customer loyalty such as Amazon does with it's Prime program or with the Kindle.

    As an example, my 77yo father, who is an avid reader, used to purchase used books on eBay but since we got him a Kindle, he hasn't bought a book through eBay in a few years.

    @ Eugenesz said Ebay is "focusing on how to streamline and make transactions more seamless and quick" ~ doesn't get any quicker than one-click shipping on Amazon. However, with eBay relying solely on third party merchants, there is no guarantee one merchant will ship in a timely manner and another take days to ship. There's no overcoming that obstacle without sacrificing merchants.

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Chad Henage

Chad is a self professed tech nerd and has been investing for over 20 years. He follows nearly everything in the technology and consumer goods sectors, and is a huge fan of the Peter Lynch investing style. He has over 1,000 published articles about stocks and investing. You can follow Chad on Twitter at @chadscards1274.

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