Amazon, eBay, Overall eCommerce Suffering from Retail Woes

The broad market is getting clobbered this morning in part by the extremely weak Commerce Department report on December retail sales - and investors are demonstrating particular zeal for dumping both Amazon.com (AMZN) and eBay (EBAY).

Commerce reported a 2.7% drop in retail sales in December, the sixth consecutive monthly decline. The report showed a 1.9% decline in sales at catalog and Internet retailers.

Pacific Crest analyst Steve Weinstein this morning said that Q4 e-commerce sales appear worse than expected. He estimates that sales were up 1% in October, then down more than 3% in November and more than 4% in December. He estimates total online sales in the quarter were down 4%, falling short of his previous forecast for flat growth.

Weinstein adds that “the trends do not bode well for 2009,” and that the decline in e-commerce spending has likely yet to bottom. He cites data from research firm Coremetrics which shows that on a year-over-year basis in December, page views per shopping session fell 9.1%, average time spent on e-commerce sites dropped 17.7%, e-commerce transactions declined 2.4% and order values fell 3.2%. Weinstein previously had expected flat e-commerce sales this year, but says there is now risk to that forecast.

As for the e-commerce stocks, Weinstein says they are “set to disappoint,” noting that since Black Friday, a period in which the Nasdaq Composite is up 0.7% and the S&P 500 is down 2.8%, AMZN is up 20.5%, EBAY is up 7.6%, GSI Commerce (GSIC) is up 16.3%, ValueClick (VCLK) is up 0.8% and Akamai (AKAM) is up 15.1%. “We believe this reflects unfounded enthusiasm for the sector and positions these stocks for disappointment,” he writes.

Both eBay and Amazon were the subject of several individual research notes this morning.

The buzz on eBay, in particular, was largely negative:

• Collins Stewart analyst Sandeep Agarwal launched coverage of the company with a Sell rating and $10 price target. He contends a recent 30% rise in the stock is “irrational,” given slowing growth, loss of market share to Amazon and others, continued structural problems in its core Marketplace business and the worsening 2009 retail outlook. He sees “material downside risk” to Street estimates. He sees profits of $1.69 in 2008 and $1.62 in 2009.
• Thomas Weisel analyst Christa Quarles repeated her Market Weight rating on the stock today, but cut her 2008 EPS estimate to $1.69, from $1.71; for 2009, she goes to $1.50, from $1.68. “For the past two years, eBay has been in transition with its business, shifting its pricing and seller policies to regain market share in a difficult competitive environment,” she writes. “This transition has become even more challenging as the company must rework its strategy in one of the most difficult macroeconomic environments of the postwar period.”
• Pacific Crest’s Weinstein writes that Q4 is likely to “fall short of expectations across all businesses,” reflecting both currency headwinds and “the failure of recent policy changes to reinvigorate demand.” He maintains his Sector Perform rating on the stock.

For Amazon, the chatter was mixed:

• Collins Stewart’s Agarwal launched coverage with a Buy rating and $65 price target; he advises a pair trade of buying AMZN and shorting EBAY. “AMZN leads the e-commerce industry with a culture of innovation and a strong customer-centric approach,” he writes. “AMZN’s top-line growth is 2.5x the U.S. e-commerce growth rate and we expect margin expansion in 2010 and beyond.”
• ThinkEquity’s Ed Weller this morning repeated his Buy rating and $70 target on the stock, but trimmed his 2009 EPS estimate to $1.38, from $1.41; for ‘09 he now sees $1.94, down from $1.97. He remains convinced that “the company seems capable of gaining significant share of large markets and of earning very high returns in the process.”
• But Pacific Crest’s Weinstein contends that the company is likely to miss expectations, and that “the slowdown in e-commerce and the impact of currency movement was too much to overcome.” He notes that the Street is looking for 14% Q4 revenue growth; his own estimate is for 12.5% growth, and he contends that even that might be too high. Weinstein maintains his Sector Perform rating, and notes that a 20x P/E in his 2009 EPS estimate would yield a stock at $26, down 49% from yesterday’s close.
• Janney Montgomery Scott’s Shawn Milne launched coverage of Amazon today with a Neutral rating, and a $48 fair value. He says the long-term growth outlook remains intact, but that “the rapid deceleration of online spending and promotional activity in Q4 (likely carrying over into Q1) may negatively impact margins and lead to further estimate reductions.”

See also yesterday’s post, Amazon: Fretting Over Margins

In today’s trading:

• Amazon.com is down $2.93, or 5.7%, to $48.52.
• eBay is down $1.08, or 7.6%, to $13.05.
• GSI Commerce is down 81 cents, or 8.8%, to $8.45.
• Akamai is down 60 cents, or 4.3%, to $13.52.
• ValueClick is down 38 cents, or $6.1%, to $5.84.
• Overstock.com (OSTK) is down 27 cents, or 2.7%, to $9.62.
• Blue Nile (NILE) is down $1.91, or 8.8%, to $19.88.
• Digital River (DRIV) is down $1.08, or 4.4%, to $23.43.
• Bidz.com (BIDZ) is up 9 cents, or 2.9%, to $3.19.

Original post

Comments

[johngonole:]

I have to weight in just to say I bought Ebay not to long ago. I'm under water a bit but its only half position. One that I might be willing to triple. I think the pessimism on EBAY is overdone. When it comes to auctions they have a wide moat indeed. They also have a wide moat when it comes to the sales of aftermarket items....think of a giant flee market.

That said the balance sheet is very strong. They are estimated to basically maintain their current earings and PE is less than 10. Long term they can grow overseas and even here in North and South America. I do think the economic contraction will effect them like anyone else due to falling prices and volume. However long term they are a market place not a vendor. I don't think they have any competitors that are about to grab market share from them.

The biggest problem EBAY is having and seems to have had for a while is figuring out what to do with their free cash flow. Eventually they will get it right.

Basically I think we are probably looking at a slow to medium growth company selling as a value stock. It also has a wide moat. Can't get much better than this. Just wish I could find 7 or 8 more companies like this to invest in.

Jan 15 01:04 AM

[leapingcat:]

Just looking at the p/e ratios in isolation gives a strange result. Amazon, which has the costs and risks associated with carrying inventory, should in theory be less profitable than Ebay, which transfers those costs and risks to third parties, yet the markets judge Amazon as being the better long-term investment.
Could it be that investor sentiment, as indicated by the quotes above, has some bearing on this. Amazon appears as a well-managed company that is affected, like everyone else, by the current downturn in the economy, but should emerge in a healthy position when it recovers and has a sound long-term strategy. Ebay on the other hand appears to be floundering, and has merely vague ideas of where it wants to be, without the strategy or management to achieve it, and this is reflected in its current value.
At present, cash is king, even though the returns are low, so I will not be investing in either company, but guess which one I will be keeping an eye on for a window of opportunity.

Jan 15 05:29 AM