Please ensure Javascript is enabled for purposes of website accessibility

Better Buy Now: eBay vs. Groupon

By Andrés Cardenal - May 15, 2016 at 7:04PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Both e-commerce players look attractively valued. Time to place a bid for eBay, or is Groupon a better deal?

Online commerce is a promising industry offering exciting opportunities for growth over the long term. Both eBay (EBAY 2.93%) and Groupon (GRPN -2.74%) are launching multiple initiatives to accelerate performance, and this could drive considerable gains for investors going forward. Which one is a better purchase right now: eBay or Groupon?

Solid profitability and modest growth from eBay

eBay is working on different areas to attract more customers to its platform and accelerate revenue growth. Such as building alliances with popular brands in apparel and improving shopping experience with better product catalogs. The company is also focusing on more precise product descriptions to try and increase traffic from search engines.

As well as these initiatives eBay is expanding into intriguing niches. The company recently launched eBay Wine which is a new platform for wine enthusiasts offering a wide variety of products, along with buying tips and guides from industry experts that make the wine shopping experience more accessible.

Image source: eBay.

The company registered a 4% increase in revenue during the first quarter of 2015, reaching $2.14 billion. In currency-adjusted terms, revenue grew 6% year over year, and management is forecasting a similar increase in the range of 3% to 5% in constant currency sales during the full year 2016. While the business is not doing too badly, eBay could certainly perform better, considering that online commerce is a remarkably dynamic growth industry.

On the other hand, the business model is spectacularly profitable. eBay reported an operating margin of 28.7% of revenue last quarter, while adjusted operating margin, which excludes stock-based compensation and other non-cash expenses, amounted to a staggering 33.4%. 

eBay stock trades at a fairly attractive valuation. The price-to-earnings (PE) ratio is in the area of 14.4, a significant discount versus a PE ratio of about 33 for the industry average and around 19 for companies in the S&P 500 index. 

Groupon is in the midst of a transformation

Groupon is going through a restructuring. The company has recently exited some international markets in order to better focus on its North American business, and management plans to move away from low-margin product categories in shopping. The main idea is streamlining and simplifying operations in order to drive superior profitability in the long term, even if this takes a toll on financial performance over the coming quarters.

Groupon wants to move away from its "daily deals" business model to become a global marketplace centered on local merchants. Management intends to attract users to the platform to search for opportunities on a regular basis, versus the old approach of sending daily deals via email. This new strategy sounds well intended, but implementation can be quite challenging, and results will probably take considerable time.

Image source: Groupon.

Transformations are seldom easy, and this is being reflected on the company's financial performance. Gross billings amounted to $1.47 billion in the first quarter of 2016, a decline of 5% in U.S. dollars and a 3% decrease in constant currency terms. Revenue during the quarter was $732 million, a 2% decline versus the first quarter in 2015. 

Management is expecting sales for the full year 2016 to be in the range of $2.75 billion to $3.05 billion, a decline versus $3.12 billion in 2015. Adding to the concerns, Groupon lost money at the operating level last quarter.

Groupon's financials are quite grim, and there is little reason to expect a material improvement over the coming months.

eBay or Groupon?

Both eBay and Groupon trade at attractive valuations, but Groupon is much cheaper due to all the uncertainty currently surrounding the company. Looking at the price-to-sales ratio, eBay is in the area of 3.1 times revenue over the last year, while Groupon trades at a considerably lower 0.63. If Groupon manages to effectively jump-start sales and improve profitability, then the stock offers a lot of upside potential from currently depressed levels.

However, that's a big "if". Groupon is struggling to consolidate a viable business model and regain relevancy among consumers, so investing in the company is quite a risky proposition right now.

eBay needs accelerated growth in order to better capitalize on its potential in e-commerce, but sales are moving in the right direction, the business model is remarkably profitable, and the stock price is attractive. All things considered, eBay looks like a much sounder investment than Groupon.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Groupon, Inc. Stock Quote
Groupon, Inc.
GRPN
$10.99 (-2.74%) $0.31
eBay Inc. Stock Quote
eBay Inc.
EBAY
$42.89 (2.93%) $1.22

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
316%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/03/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.