eBay Offers Something Amazon Cannot

The world’s largest online auctioneer, eBay (EBAY), reported first quarter earnings today. So much of the attention has been focused on another outstanding quarter put out by Apple (AAPL) that eBay receives little more than a passing glance from some investors. But eBay is trading much higher in after hours up more than 5.5% in addition to the 3.5% increase today. The gang at CNBC’s Fast Money discussed which stock is the best internet retailer to invest in right now: Amazon (AMZN) or eBay.

“…You’ve got a company {AMZN} trading at a 30 multiple on top of that with revenue growth of only about 20%. To me there’s a lot better places to put your money. eBay, which reported after the close today, which we have an investment in, by comparison, they’re trading at 10 times. The stock’s up about 6% this I think there are a lot better places to put your money than to try to chase this and hope…

…The retail environment starting to weaken, et cetera. I mean, the stock’s up 50%. So if he thinks it’s going to go up another 50% from here, this, for me I’d rather own eBay at up 6%, thinking it can be up another 30% to 40% this year, which I think is totally valid. I don’t think we’re — we’re not disagreeing on Amazon being a great company over the next two or three years but from here I take eBay.”

It's not difficult to argue that eBay has the more attractive valuation considering the relative performance of the two stocks year to date. As you can see from the Ockham historical valuation, we have liked eBay for some time, for better or worse. Furthermore, Fast Money actually downplayed the difference in price-to-earnings ratios between the two. Amazon, which will report earnings on Thursday, is expected to make about $1.50 per share for the year, which yields a basic P/E of more than 50. Now, when you back out $8 per share in cash that the company had at the end of fiscal 2008 the multiple gets only slightly better at 47.

In contrast, eBay is comparatively much cheaper. Prior to factoring in the first quarter results, eBay was anticipated to make $1.42 EPS for FY09, which puts the simple P/E multiple at just over 10. Then granting eBay the same courtesy given to AMZN of backing out the $2.37 per share that the company has in cash on their balance sheet as of today’s announcement, and the result is a multiple under 9. There is a significant difference in the way the market is valuing these two companies that are earning roughly the same amount per share.

Now, don’t misunderstand me, this is not an argument that these two companies should receive the same valuation multiples from the market. After all they are different businesses with different strengthens and challenges. eBay is dealing with declining revenue on a YoY basis as online auction traffic has dropped, while Amazon is still growing revenue impressively and has one of the hottest gadgets on the market, the Kindle. However, for a value investor there is little doubt about which company looks more attractive at current price levels given the current fundamentals. That is why eBay receives our Greatly Undervalued valuation, while Amazon for now is Fairly Valued.

To invest in Amazon at current levels, is to believe that the market has not priced in the growth that the company is experiencing, which may in fact be true but seems less likely given the stocks awesome recent performance. Clearly by Ockham’s methodology, in contrast to Amazon’s growth story, eBay has been beaten down in the market too much and offers far more value.

Original post

Comments

[User 283977:]

Future performance of these two companies will be determined by how happy their customers are. There are quite a few negative comments about Ebay on Seeking Alpha with respect to its management and the changes made by that management from both buyer and seller perspectives. Its easy to bump a companies bottom line short term. The question with respect to being long on Ebay is very much a question of customer (buyers AND sellers) satisfaction, specifically with respect to the changes by the current management. Based on what I have seen posted by Seeking Alpha members, Ebay might be a better short prospect.

Apr 22 07:28 PM

[PastTense:]

Some retailing formats work; some don't. For internet retailing three formats seem to work: 1. company having its own website and advertising on Google..., 2. Amazon style, 3. old-fashioned eBay style.

The current eBay format is a bizarre format which has the disadvantages of the above formats, but not of the advantages. Thus traffic is rapidly declining on that venue. Nothing will change there unless there is a total replacement of Donahue and other top management.

Apr 22 08:08 PM

[redbaron:]

I continue to believe that the eBay can be fixed, and there are some hints that management is actually going to try to get back to something close to the basic strategy that did work in the past. Whether or not current managment can actually do that, is the question, IMHO. Nothing succeeds like success, and that of course is much of what made eBay work in the first place. The strategy is simple, and it does work if a good balance between buyer and seller can be moderated by the company. The problem for current management is going to be, 'How are they going to go back to the old workable business plan, and make it look like it is something new and different?' If they can do that, they can succeed, but if they can't, then it will take a new team to accomplish the transition by going back to the game plan that worked before.

IMHO

Apr 22 08:42 PM

[Leftfield:]

Donohoe has staked his arrogant pride on selling out to large vendors of same-old-same-old and has thrown out the "noise" (small sellers) as much as he could. He's done everything possible to negate Ebay's uniquely democratic model of providing a forum for buyers and sellers large and small to make Ebay a commercial strip mall festooned with popups and hostile to small sellers. Sadly, the board that foolishly elected him and went along with this is likely to follow the modern way of obscenely overpaid leadership and stick with all this until Ebay is a footnote.

Apr 22 09:18 PM

[nadine:]

To the author: Check the revenue and earnings trends for eBay. The trend is not your friend.

Donahoe squandered much of eBay's good will and market share on an ill-conceived campaign to compete with Amazon. Even the analysts on Wall St can see that this effort has failed. Donahoe is now trying to backpedal into something that will work for eBay and obfuscate their failure; that's what all the blather about "secondary market" is about. However, believing that auctions are obsolete (despite still providing half eBay's GMV), he has not yet attempted to support them, even though they remain at the core of eBay's Marketplace business. The Marketplace business will continue to flounder until he returns to supporting the eBay core brand. The most you can say about eBay's latest moves is that they have stopped actively running off sellers. Now Amazon just pulls them away with better service and results.

Apr 22 10:27 PM

[Dan Buchanon:]

The author's point about both companies' essentially earning the same about in profit (roughly $1.45 to $1.50 per share on an annual basis) hits you right in the crown jewels -- if you're look at this from an investment opportunity perspective. It takes Amazon about $20 billion in annual revenue to eek out $1.50 per share; while it generates the same per share profit on roughly $9 billion in annual revenue. In an economic environment where overhead can be an albatross, Ebay's model sans infrastructure seems less risky to me. And the 10 P/E is almost giving it away.

Indeed, Ms. Norrington's turn around strategy will make or break Ebay. If she doesn't reverse growth trends, there will need to be a major shake up at the company. You can almost smell the angst.

Apr 23 01:09 AM

[johngonole:]

Long term I like Ebay and have invested in its shares. AMZN is too rich as always. When their growth rate drops the shares will stagnate. EBAY has a better moat because it is essentially made up of millions of small nimble independant sellers. EBAY makes money from the recycling of materials which is also good for the economy. I can find things on EBAY that I can't find anywhere else. About 70% of the time I can find the item cheaper on EBAY then AMZN. EBAY does need to allow sellers to rate the buyers like they used to. While fraud used to be on the seller side now I suspect the buyers will be taking advantage now. The power seller system though is solving much of the buyers remorse issues. EBAY recent monopolization of South Korea has to be a good thing for them. There can be only one sucessfull online auction company. Craigslist is probably there biggest threat. However lets face it finding things on Craigslist is much more difficult. EBAY should buy it if the price is low enough

Probably EBAYs biggest problem has been there mis use of cash on their balance sheet. Still they've got a big lead and will be around for a very long time as long as management doesn't wreck the company which would be hard to do.

Apr 23 02:53 AM

[leapingcat:]

'EBAY has a better moat because it is essentially made up of millions of small nimble independant sellers'
Not nowdays; they have been squeezed out by the mass sellers of new junk. Even then I find it easier to buy things on Amazon; I've just bought a cable on Amazon because the listing gave me the information I wanted, the ebay equivalent (from China) just didn't have enough information; the couple of pounds (or dollars) more was a small price to pay.
Perhaps investors are now looking at the fundamentals rather than the BS put out by managements.

Apr 23 04:19 AM

[raytayzmd:]

...absolutely..."old-f... eBay style," in particular...the old ebay before Paypal was interesting...sure, you got ripped off now and then but you could also find real bargains now and then...and selling things as well was relatively straightforward...now, it's just a mess...more red tape than the federal government...and anymore it appears that most of the "auctions" are really just "storefronts" basically just offering a fixed price by the indirect avenue of bidding...ebay would have been better off just sticking to their original format.


On Apr 22 08:08 PM PastTense wrote:

> Some retailing formats work; some don't. For internet retailing three
> formats seem to work: 1. company having its own website and advertising
> on Google..., 2. Amazon style, 3. old-fashioned eBay style.
>
> The current eBay format is a bizarre format which has the disadvantages
> of the above formats, but not of the advantages. Thus traffic is
> rapidly declining on that venue. Nothing will change there unless
> there is a total replacement of Donahue and other top management.

Apr 23 09:16 AM

[fatseal:]

I no longer shop at ebay, because I can't find what I want on ebay anymore. I hate wading through 100's of similar listings of jewelry from China that is base metal and glass, listed as gold and gemstones, and when I try and find old books, I can't find what I want. I was looking for some older, out of print children's books for my daughter for Christmas. I found none on ebay, and so bought them on Amazon. The problem with ebay is that they have lost so many seller's due to their policies, and all the changes, that I can no longer find what I want on ebay. Ebay is no longer the place to find "it" and once they quit having what they buyer's want, they will cease to be important. I can't find what I want, and so I look elsewhere, since the selection is not as good and the search is frustrating. They have made so many "improvements", but they've succeeded in improving themselves to death.

Apr 23 10:28 AM

[Et tu, Brute!:]

I am constantly amazed and flabbergasted at continued ignorance of stock reporting regarding the internal disease that is now ebay.

By the same token, why would I want to "go back" -- should ebay return to its roots out of near-fatal desperation -- to a company so despicable?

I MUCH prefer growing other sites! Thank you very much!

Apr 23 06:01 PM