E-commerce businesses thrived at the pandemic's onset as billions of people flocked online to avoid shopping in person. eBay (EBAY -0.26%) and Chewy (CHWY 2.13%) were no exceptions, and each benefited from the tailwind. The trend is moderating in the near term as economies reopen.
In the longer run, an increasing share of spending is likely to happen online. With that backdrop, which is the better e-commerce stock to buy, eBay or Chewy?
Chewy is an exclusively online pet retailer. It has had success in rapidly growing sales from $901 million in 2016 to $8.9 billion in 2022. Chewy not only benefited from the shift to online spending during the pandemic, but also from an increase in pet ownership. Folks spending more time at home away from friends, family, and coworkers looked for companionship with pets. Millions of folks brought home furry friends they are likely to keep for a decade or more.
Chewy is not yet profitable on the bottom line, but it's demonstrating excellent economies of scale as its gross profit margin expanded from 16.6% to 24.4% from 2016 to 2022. If sales continue rising, it could only be a matter of time before Chewy's profits turn around. Rising inflation will not make this task any easier in the near term as the company works to pass along these costs to consumers. Longer-term, Chewy is confident it can approach a gross profit margin of 28%.
Chewy boasts 20.7 million active customers as of Jan. 30, a 7.6% increase from the same time the year before. These customers increased their average spending on Chewy.com by 15.6% year over year to $430. The robust and growing user base could also help Chewy reap additional benefits by showing advertisements -- a potentially lucrative source of revenue the company plans to launch in 2023.
Although eBay is an e-commerce business, it operates on a different business model from Chewy. eBay does not own any of the inventory sold on its platform. Additionally, it leaves shipping and fulfillment arranged between buyers and sellers. In that way, eBay is an asset-lite business. It makes money by taking a percentage of each transaction on the website and app.
eBay has been around for a couple of decades and is in the mature stage of its business cycle. It's not growing revenue like Chewy. In the previous decade, eBay's revenue has fallen from $14 billion in 2012 to $10.4 billion in 2021. Note that this includes the effects of divestitures.
That said, eBay has grown earnings per share at a compound annual rate of 23.9% in the time mentioned above. In the last few years, eBay has boosted profits by decreasing promotional activity (fewer coupons and incentives) and increasing the fees it charges sellers on the platform. The aforementioned policies and economic reopening have led eBay to lose millions of active customers. The figure fell to 142 million in its most recent quarter, down from 163 million at the same time the year before.
Chewy specifically sells pet products, which could limit its upside. eBay's asset-light business model could immunize it from inflationary pressure infecting businesses worldwide. Both are excellent enterprises that are likely to make shareholders wealthier in the long run.
If you had to choose one stock to buy, it should be Chewy; the company is trading at a significant discount to eBay. The valuation difference is enough to overcome the near-term headwinds from supply-chain disruptions likely to hurt Chewy.