eBay (NASDAQ:EBAY) and Amazon (NASDAQ:AMZN) are two of the fiercest e-commerce companies out there. But which one has shown more strength lately? In this recap, we'll compare the most recent quarter's numbers to see what we can learn.


Q3 2006

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YTD Free Cash Flow





Q3 2006

Q3 2005






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Gross Margin




Operating Margin




Net Margin




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Figures in millions

These two giants obviously have different business models, so this is more of a fun exercise -- but it's also informative. eBay was a leader in sales and earnings growth, but Amazon was better at using its leverage and keeping margins fairly flat. Does this mean Amazon is the better competitor? Not necessarily. For starters, eBay's acquisition of Skype helped drive its strong sales growth but also caused its operating margins to plummet. While PayPal's growth was stronger than the auction business, eBay's Skype will hopefully be monetized in the near future. As we speak, Skype Me buttons are being tested in eBay auctions in markets all over the world.

When Rick Munarriz was analyzing the most recent quarter, he pointed out that "Thankfully, eBay swallowed whole is starting to look pretty compelling anyway. The company has been aggressively buying back stock. It is looking for earnings to grow by at least 20% next year. Sure, free cash flow dipped this past quarter after the company made big investments in software and data centers, but you can't expect to pay imperfect prices for perfect stocks."

What about Amazon? Its growth has been accelerating and it's moving into digital delivery of music and video. That has potential. But with Wal-Mart and other rivals coming out with their own services, it's also more uncertain. Amazon has also been stockpiling inventory ahead of the holiday season, but I'd like to wait until after the supercharged fourth quarter before making a call on that.

Both companies experienced lower free cash flow on a year-to-date basis. In eBay's case, it was due to investments for expanding capacity. For Amazon, lower cash has been a result of the increased inventories. I'm pretty confident that after the strong holiday quarter, the company's cash flow will stabilize, but we'll have to wait and see.

At these prices, my pick in this battle is eBay. Its acquisition strategy looks to be paying off, and management is focused on finding synergies among the various businesses. I'm confident it can effectively integrate Skype and continue the strong growth at PayPal. Stay tuned for more recap battles as we look back at earnings season and see which competitors have come out on top.

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Fool e-commerce editor and Motley Fool CAPS All-Star Shruti Basavaraj owns shares of eBay. The Fool's disclosure policy is a behemoth in its own right.