E-commerce is a booming industry that offers tremendous opportunities for growth in the long term. Different players in the sector have their own business models, and each company offers a singular combination of risk and potential for gains.
Let's look at three leading players in the industry -- Amazon.com (AMZN -1.65%), eBay (EBAY 0.31%), and Groupon (GRPN 8.21%) -- and try to find out which stock may be the best for your portfolio.
Amazon is all about growth
Amazon is a very particular investment case. The company is all about growth and innovation, even if this comes at the expense of profit margins. Amazon prices its products at aggressively low prices to undercut the completion and gain market share in different retail categories. In the words of founder and CEO Jeff Bezos, "Your margin is my opportunity."
In addition, Amazon is heavily investing in building its gigantic distribution network and fulfillment centers, adding digital content to its catalog, and growing its Amazon Web Services division, among other things. This investment demands considerable capital expenditures and represents an additional burden on profit margins.
This means Amazon is losing money at the operating level: The company reported an operating loss of $15 million during the second quarter of 2014, and management expects a much wider operating loss in the range of $410 million to $810 for the third quarter.
Source: Amazon.com.
On the other hand, Amazon is generating truly extraordinary growth rates considering the company's size. Total sales jumped by an impressive 23% to $19.34 billion in the second quarter, while net product sales increased 19.6% to $15.25 million.
Competitive strength is out of the question when it comes to Amazon. Massive scale and efficient operations provide crucial cost advantages for the online retailer as it focuses on discounts. The company becomes stronger as it becomes bigger over time, since it can spread its fixed costs over a growing number of products, hence reducing fixed costs per unit.
It's hard to tell when Amazon will cut back on spending and increase profitability, but there is no reason to expect a change in strategy anytime soon. Nonetheless, the online retail juggernaut is remarkably well positioned for growth over the long term.
eBay is a solid performer
eBay is in the business of matching buyers and sellers of all kinds of products. Unlike Amazon, which is considered a dreaded competitor by most traditional retailers, eBay is a friendly commerce facilitator that provides brick-and-mortar operators with an opportunity to join the online revolution via an established and successful platform.
Besides, the business model has lighter capital requirements, and this allowed eBay to generate a 36.3% segment margin in its marketplaces division for the second quarter of 2014. However, eBay is not growing as rapidly as Amazon in e-commerce; the marketplaces segment delivered a 9% increase in revenue to $2.17 billion during the quarter.
Source: eBay.
PayPal is a crucial strategic asset for the company. The payments division is a huge and growing business; sales jumped 20% to $1.9 billion in the last quarter, while segment margin came in at 24.5%.
eBay's e-commerce and payments divisions complement each other quite well, and the company is a solid industry player with growing sales and healthy profitability. Investors looking for a reliable and predictable performer in the business may prefer eBay over Amazon, even if this means accepting slower growth rates.
Groupon: the turnaround candidate
Groupon is in the midst of a transformation. The company wants to be considered a global marketplace that can be accessed from any device at any time, not just a daily deals service. Groupon wants users to go to the platform searching for opportunities, versus the old approach of receiving daily deals via email.
Management has identified mobile as a key growth driver for the company, and Groupon is making progress in that important segment: The company says nearly 92 million people around the world have downloaded its mobile app, and mobile represented over 50% of sales as of the second quarter of 2014.
However, financial performance has been mixed under this renewed business model. While the company is generating healthy sales growth, profitability is still lacking.
Source: Groupon.
Gross billings, meaning the total dollar value of customer purchases, increased 29% to $1.82 billion during the quarter. This produced a 23% increase in revenue during the period, reaching $751.6 million.
Nevertheless, profit margins are declining due to increased spending to generate sales growth, so adjusted EBITDA came in at $59 million during the quarter, versus $81 million in the second quarter of 2013.
The main question for investors is whether the company has what it takes to sustain sales growth while increasing profitability. This is no easy task, especially considering that Groupon is competing against established players such as Amazon and eBay.
If management proves that it can succesfully transform the company, the stock could offer substantial upside potential, as this would dissipate a considerable amount of uncertainty surrounding Groupon. Turnarounds are seldom easy, but when successful they can be very profitable for investors.
Key takeaway
eBay is the reliable and predictable choice in e-commerce, and the payments division looks particularly promising for the company's investors. Amazon is all about growth and competitive strength, even at the expense of short-term profit margins. Groupon is the turnaround play in the sector; this means considerable risks for shareholders, but also big upside potential if things work out as expected. There is plenty of variety to choose from among e-commerce stocks, so press the buy button according to your own needs and preferences.
