eBay (EBAY 0.88%) and Etsy (ETSY -0.86%) stocks both seem like relative bargains today. Sure, the e-commerce platforms have seen their growth rates slow compared to previous phases of the pandemic. And Wall Street is worried about more weak results ahead if economic growth rates stumble.
But their share price movements don't seem to reflect major strengths in the businesses such as improving profitability and the prospect for gushing cash returns.
With that big picture in mind, let's take a look at which stock might make the better buy for investors seeking exposure to this attractive niche in the e-commerce industry.
Financial strength goes to eBay
Both companies have an asset-light operating model that shifts many of the costs and risks of retailing onto sellers. Etsy doesn't maintain huge inventory levels, for example, or a massive shipping supply chain. That's a big reason why the company's operating profit margin is nearly 16% of sales, compared to just 4% for a more vertically integrated retailer like Walmart.
Yet eBay stock should be your preference if you're going strictly on financial strength. The company routinely turns over 25% of sales into operating profit, making it one of the most efficient businesses in the space.
EBAY Operating Margin (TTM) data by YCharts
Those margins have declined since the pandemic threat faded, but the bigger picture is bright on this score. eBay is adding more value to its platform for sellers, allowing it to charge higher fees. And its new push into advertising and payment processing will lift margins higher over time.
Cash-focused investors will also love eBay for its ability to generate free cash flow, much of which is paid out as dividends and stock buybacks.
Growth potential goes to Etsy
An investor who prizes growth might find more reasons to buy Etsy today. While eBay has shed buyers for several consecutive quarters, Etsy's growth hangover has been much easier on the business. The buyer pool has risen by about 4% over the first half of 2022, compared to a 12% decline at eBay. "Etsy has maintained most of our pandemic gains," CEO Josh Silverman said in a late July statement.
Etsy is hoping to further consolidate those gains over the next few quarters by improving the shopping experience. Additions like video-based buyer reviews will help, and so will its revamped search functionality, which uses artificial intelligence to deliver personalized results for people browsing the site.
eBay has some attractive growth targets, too, including advertising and payments processing. The marketplace has proven it can win share in high-growth niches like rare sneakers and collectible watches. Yet it is easy to see how Etsy could double its current annual sales footprint more quickly than eBay could.
The better deal
Etsy's stock has also been hit harder by the 2022 market downturn, removing some of the risk associated with buying into the growth-focused business. Sure, at over seven times sales you are paying a big premium to purchase its stock compared to eBay's price-to-sales ratio of below 3. But that valuation has come down from nearly 20 in earlier phases of the pandemic.
Etsy stock could move back toward that higher valuation level if the company maintains its growth while boosting profitability toward eBay's industry-leading rate. While the safer choice might be the globally established eBay, long-term investors seeking faster growth should take a closer look at Etsy right now.
