Earlier this month, eBay (NASDAQ:EBAY) and Google (NASDAQ:GOOG) were passing ships in the sea of online supremacy. With Google's brilliant earnings report and eBay's cautious outlook a couple of weeks earlier, Google overtook eBay to command the largest market cap among Internet stocks.
Sure, Time Warner (NYSE:TWX) and Microsoft (NASDAQ:MSFT) carry loftier price tags, but if they were ever to spin off AOL and MSN.com, respectively, they would surely attract less than the $50 billion value that Google and eBay are fetching these days.
So where would you invest if you had to choose between buying into eBay or Google? They are both amazing companies. It's hard to argue against that. But would your money be better off riding on the established auctioneer or the faster growing search engine? That's the score we're looking to settle here, so let's take a closer look at both companies.
Be my little eBay
Whether eBay actually started out as a site to swap Pez dispensers or its ball park of urban folklore, the end result has been a colossal collection of buyers and sellers flocking to where the auction action's at. How big is eBay these days? Huge. The company helped play matchmaker to $34.2 billion worth of transactions last year. With 1.4 billion items put up on the eBay auction block in 2004, odds are that if you're looking for something, eBay has someone ready to let it go to the highest bidder.
The company has been a vibrant organic grower, yet it has never shied away from making a super tactical acquisition. When Half.com threatened its model by providing an open marketplace of sellers, eBay bought it out. When PayPal was trumping eBay's own online payment service as the deal closer of choice, eBay bought it out. When Craigslist.com was growing like a weed with a billion monthly page views as a free bulletin board -- including free marketplace listings -- eBay nibbled and bought a minority stake in the venture.
It wasn't just a matter of owning the rights to muzzle the competition. PayPal has grown to more than 64 million accounts and last year helped facilitate $18.9 billion worth of financial transactions.
What's eBay's take in all of this? Plenty. It closed out 2004 earning $1.14 a share (before next week's 2-for-1 stock split) with $3.27 billion in revenues. The top line rose by 51%, and its bottom line surged by 76%. That was snazzy, but not so jazzy, since domestic growth has been gradually slowing. So eBay's stock took a hit when it guided investors to expect the year ahead to produce earnings between $1.37 and $1.41 a share, with revenues of roughly $4.3 billion. Earnings growth of no more than 24% and revenues to spike by no more than 33% in 2005? The market sobered to eBay's valuation, and it didn't like what it was seeing.
| eBay | 2003 | 2004 | % Gain |
|---|---|---|---|
| Revenues | $2.16 billion | $3.27 billion | 51% |
| Earnings | $441.8 million | $778.2 million | 76% |
| Free Cash Flow | $508.7 million | $992.5 million | 95% |
Ogle at Google
When Google had originally priced last summer's IPO as high as $135 a pop, investors got cold feet and the popular online search site had to humbly retreat to an $85 price tag. Two public quarters of heady performance later, it's easy to see why Google is getting the last laugh.
Revenues more than doubled in 2004, as the company chimed in with a hearty $3.19 billion sum. Earnings more than tripled to reach $1.46 a share. The driver to Google's good fortune? Paid search.
Having sponsors pay for ad placement on the site's heavily trafficked search result pages has proved to be a win-win situation as advertisers get to target their audience effectively by bidding on keywords while and Google is able to generate a healthy living without resorting to sticking its users with annoying popup and multimedia ads.
This was an area that Overture pioneered before it was acquired by Yahoo! (NASDAQ:YHOO), yet Google has made an even bigger splash by partnering with content and search sites of all sizes through its AdSense program. In fact, just 51% of the company's revenue is being generated by its own sites these days, as contextual ads are serving up relevant ads for webmasters all around the world.
Unlike eBay, Google isn't divulging what its internal crystal ball is predicting. Analysts, who have sorely underestimated the company's profit potential for two straight quarters are now looking for earnings to more than double in 2005 -- to hit $3.92 a share. Just last week they were perched at the $3.42 mark.
| 2003 | 2004 | % Gain | |
|---|---|---|---|
| Revenues | $1.47 billion | $3.19 billion | 118% |
| Earnings | $106 million | $399 million | 278% |
| Free Cash Flow | $219 million | $658 million | 200% |
Dueling Fools or drooling fools
Still not sure about which company you would rather invest in? You're not alone. Different gauges favor different equities. We haven't talked about free cash flow yet, so let's scratch and sniff on that front.
Last year Google's free cash flow tripled to $658 million while eBay's free cash flow nearly doubled to $992.5 million. Is the pattern starting to look familiar? eBay is sporting higher levels of revenue, earnings and free cash flow, but it is Google that is growing those line items faster.
Quick feet are important. Going by the market's forecasts for 2005, Google will actually lap eBay in terms of revenues and net income, yet eBay has two important factors working for it. The first is that the company produces stronger margins. Net margins for eBay came in at 23.8% last year, while it was a more modest 12.5% showing for Google. While that figure may be somewhat understated because Google's revenues include the amount it pays its partner sites for producing AdSense revenue, even after you back those traffic acquisition costs out -- like Yahoo! does -- you still find eBay putting up healthier margins.
| As of 2/7/05 | eBay | |
|---|---|---|
| Market Cap | $50.1 billion | $53.6 billion |
| Price/Sales | 15.3 | 16.8 |
| Price/Earnings | 64.4 | 134.4 |
| Price/Free Cash Flow | 50.5 | 81.5 |
| Price/2005 Earnings est. | 54.5 | 50.0 |
While eBay appears to be the better value, that last line is sobering. Because Google is growing so fast -- and eBay so slow -- Google is trading at a lower forward earnings multiple. Yet eBay has an ace up its sleeve. The company has proved to be recession-resistant. Earlier this week it had to rescind some of its latest rate increases, but auctioneers usually accept the hikes because they know that eBay is where the bidders are. Google is doing great right now, but if paid search ever falls out of favor it will be a rude awakening for the company's financials.
So, is it Google or eBay? While each one has proved to be a spectacular company, eBay has proved mortal lately, while Google's model may be vulnerable. That's why I will gladly show my respect to both, but ultimately favor the young breed of Rule Breaker stocks. Reason: The only thing better than siding with either Google or eBay today is siding with the would-be Google or eBay of tomorrow, before it commands a $50 billion price tag.
- Cast your vote in our Dueling Fools discussion board poll.
- How did Google do in 2004?
- What about eBay's performance last year?
Longtime Fool contributor Rick Munarriz is a satisfied Google and eBay user. However, he does not own shares in any of the companies mentioned in this story. The Fool has a disclosure policy. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
