eBay (EBAY 1.76%) and Amazon (AMZN 0.64%) were both founded in the mid-1990s and revolutionized online shopping. eBay was the first online auction platform for person-to-person transactions, while Amazon evolved from an online bookstore to an online superstore.
Amazon went public at $18 per share in 1997, and eBay went public at the same price in 1998. If you had invested $1,000 in Amazon's IPO, your stake would be worth $2.1 million today. If you had invested $1,000 in eBay instead, your stake would be worth about $352,000. That amount includes $66,000 in eBay shares and $286,000 in PayPal (PYPL 3.54%) shares, which were spun off in 2015.
Both companies beat the market over the past 20 years, but Amazon clearly generated bigger returns. Let's see why that happened, and why Amazon remains a better overall e-commerce investment than eBay.
A better business model
eBay connects sellers to buyers, but it doesn't take on any inventories. Sellers generally need to fulfill their own orders, and eBay only recently launched a fulfillment service for high-volume sellers.
This business model faces two major challenges. First, it's difficult for eBay to weed out fraudulent sellers and counterfeit products. Second, it faces intense competition from disruptive platforms, like the artisan marketplace Etsy (ETSY 8.22%) and the e-commerce services provider Shopify (SHOP 1.43%), which helps merchants build their own shopping websites.
Amazon's first-party marketplace takes on inventories and fulfills orders with its own logistics network. That's a more capital-intensive approach, but it makes more of an effort to protect buyers from fraudulent sellers and it provides a streamlined system for returns and refunds. It's also pulling sellers away from eBay with its own third-party marketplace.
Smarter expansion strategies
As eBay's platform matured, it tried to boost its revenue with new services, including Skype, PayPal's online payments, Half.com's fixed-price platform, the online tickets platform Stubhub, and online classifieds.
But those investments diluted eBay's brand, fragmented its focus, and weighed down its margins. It eventually sold Skype, spun off PayPal, shut down Half.com, divested Stubhub, and plans to sell its classifieds platform by the first quarter of 2021. Those moves might cut costs and streamline eBay's business, but they'll also reduce its online presence as other e-commerce platforms expand.
Amazon also made some bad investments, but two smart moves turned it into a tech powerhouse. In 2005, it launched Amazon Prime, a subscription service for free two-day shipping and discounted one-day shipping. The service hit 150 million paid members at the end of 2019, and now locks in subscribers with discounts, streaming media services, and other perks. Prime's ongoing growth widens Amazon's moat against other retailers.
In 2006, Amazon launched Amazon Web Services (AWS), which would eventually become the world's largest cloud infrastructure platform. Today, Amazon generates most of its profits from AWS, which subsidizes the growth of its lower-margin online marketplaces, its brick-and-mortar stores, and its Prime ecosystem.
eBay doesn't offer a subscription service for buyers, and it doesn't own a cloud business that can support the expansion of its e-commerce ecosystem. That's why Amazon continues to expand while making money hand over fist, while eBay is seemingly treading water with a stagnant business model.
It's growing at a much faster rate
eBay's revenue rose 1% last year, and its adjusted EPS from continuing operations grew 22%. In the first nine months of 2020, its revenue rose 15% year over year as its adjusted EPS from continuing operations jumped 56%.
eBay management attributed that robust growth to an acceleration in online orders throughout the pandemic. It expects the company's organic revenue to rise 19%-20% for the full year on a constant currency basis, and for its adjusted earnings to rise 18%-20%.
Those growth rates look robust, but CFO Andy Cring warned that eBay's "temporary COVID-related growth" should "moderate as mobility increases over time" during last quarter's conference call. Analysts expect eBay's reported revenue and earnings to rise 8% and 9%, respectively, next year.
Amazon's revenue and earnings rose 20% and 14%, respectively, in 2019. But in the first nine months of 2020, its revenue rose 35% year over year as its earnings surged 68%. The pandemic lit a fire under both its e-commerce and cloud businesses, and analysts expect its revenue and earnings to rise 35% and 52%, respectively, for the full year.
Next year, analysts expect Amazon's revenue and earnings to rise by 18% and 30%, respectively. Amazon will also likely face tough year-over-year comparisons next year, but its core e-commerce and cloud business should remain resilient. eBay's aging business model, on the other hand, faces a murkier future.
eBay's stock is cheaper for obvious reasons
eBay's stock looks cheap at 14 times forward earnings with a forward dividend yield of 1.3%. Amazon's stock trades at 60 times forward earnings and the company doesn't pay a dividend.
But eBay's stock is cheaper for obvious reasons: It's shrinking as Amazon expands, it lacks an edge against disruptive challengers like Etsy and Shopify, and it doesn't own a formidable growth engine like AWS or Prime. Therefore, investors should pay a slight premium for Amazon compared to a discount for eBay's slower-growth business.