eBay and Overstock Get Slammed, Is Amazon Next?

Shares of Overstock.com (BYON -0.96%) plunged 12% Thursday after its earnings fell short of expectations by a penny. Such a hit for missing by a penny is indicative of the way the stock market is treating any misstep these days. Overstock said its net income rose 29.6% to $3.5 million, or $0.14 cents per share, from $2.7 million, or $0.11 cents per share in the same quarter a year ago. Analysts were expecting $0.15 cents. In addition, shares of online auctioneer eBay (EBAY 0.88%) fell 4% after announcing third-quarter revenue of $3.89 billion, falling short of the $3.91 billion that analysts predicted. Should the other player in this space,Amazon.com (NASDAQ: AMZN), not meet expectations on Oct. 24 its shares may get slammed, too.

Lack of results
"U.S. e-commerce softened considerably and we have a cautious outlook for the holiday season," Bob Swan, eBay's chief financial officer and senior vice president of finance, told investors in today's conference call. eBay reported third quarter net income of $689 million, or $0.53 per diluted share, up 16% from the same quarter a year ago, driven by revenue growth and the sale of investments in RueLaLa and ShopRunner. eBay saw tremendous growth in its PayPal business too.

The big drivers for all three of these businesses is shopping convenience and competitive pricing for online consumers. U.S. online retail sales are expected to grow 13% this year over 2012. Overstock, eBay and Amazon enable billions of dollars in e-commerce. 

Amazon and Overstock are well known for offering big discounts which can hurt  profit margins. Meanwhile, eBay has much stronger net profit margins. Here's a few key metrics for these companies:

One of the most impressive improvements at Overstock is average order size climbing 16% to $170 in third quarter 2013 compared with $147 during the same quarter a year ago. As a result, total net revenue for Q3 2013 was $301.4 million, up 18% from $255.4 million in third quarter 2012. Overstock also saw a 2% increase in orders.

Overstock's gross profit for Q3 2013 was $59.2 million, a 27% increase over Q3 2012. The increase in gross profit was primarily due to higher revenue and a shift in product sales mix into higher margin home and garden products, the company said.

The Amazon Mystique
Amazon has been a pioneer in online retailing since the mid-1990s and dominates as the largest online retailer. The company has been operating with thin margins for a long time. As a result, the company struggles to turn a profit. With 38 analysts covering Amazon, the consensus EPS estimate is -$0.09 per share loss, and the high and low estimates are $0.20 and -$0.32, respectively. Amazon is the big kahuna here, but Overstock and eBay are valued more cheaply based on fundamental metrics. Amazon has a strong balance sheet with $7.4 billion in cash and $3 billion in debt, so it can afford to discount, but at some point investors are going to want Amazon to improve its margins.

Conclusion
Overstock, Amazon and eBay are solid companies. Overstock has had a nice run-up this year of 80.78% year-to-date return through Oct. 17 while Amazon's stock is up 23.8%. But eBay stock has performed miserably, up less than 1% year-to-date while the S&P 500 is up 21.5%. 

Of the three online retailers featured here, Foolish investors might consider adding eBay to their portfolios. It's trading at a lower valuation relative to its peers. eBay has a 25 P/E ratio compared to Overstock's 30 P/E and Amazon's 362 P/E. Watch Amazon's third quarter report next Thursday as it will be interesting to see if the company meets expectations. It's also important to keep in mind that while the recently reported bumps in the road are unfortunate in the short term, its hard to imagine any of these business doing anything but performing well in the years ahead as consumers continue to shop more and more online.