Right or wrong, eBay's (EBAY) quarterly results are often used as a barometer for Amazon (AMZN) results. While Amazon is a more diversified company, both companies rely heavily on the business model of matching buyer and seller without actually purchasing inventory. Further, the collision course between eBay and Amazon has been well documented, especially as it relates to eBay's attempts to poach Amazon 3P sellers. Do these similarities actually show up in results?
Comparing Quarterly Growth
Looking back 14 quarters (prior to the latest Q1 results), there does not appear to be a strong correlation between the two companies. A "best fit" line is flat and the goodness of fit measure (R2) nonexistent. This is largely a result of the 2009/2010 period when eBay was sputtering along with negative to positive single-digit growth while Amazon was humming along with growth in the 20-40% range.
Comparing the six quarters leading up to Q1 results looks a bit different, however. Visually, there is a more defined relationship between quarterly revenue growth rates and the R2 measure rises to a more respectable level.
If you forecast Amazon's Q1 sales growth based on eBay's 14% Q1 growth rate, Amazon's rate would be ~23% - a reversal in the declining growth of the prior six quarters. (Acknowledged that this is only six observations and other caveats are included below.) Sure enough, Amazon announced Q1 net sales growth of 22%; 24% without the foreign exchange rate impact.
The Nitty Gritty
If you regress Amazon's growth rate on eBay's, you get a line equation of: y = .74% * x + 13%. Evoking grade school math, a line equation is y = m*x + b
- m is the slope
- b is where the line crosses the vertical axis, or 'intercept'
- x in this case is the value of eBay's growth rate
- y then is the predicted value of Amazon's growth rate
An intercept of 13 in the above equation means Amazon's growth rate would be 13% if eBay's was 0%; the slope of .74% means that Amazon's growth rate increases by .74% for every 1.00% increase in eBay's growth rate. eBay reported a 14% growth rate, so that would add ~10 percentage points to Amazon's base growth rate of 13%... equating to a predicted growth of ~23%.
Y = .74% * x + 13%
Equation with eBay's growth rate of 14% plugged in:
23% = .74% * 14% + 13%
Of course, there is a range of confidence with any prediction. Just because the prediction was right in line with actuals this quarter doesn't mean the same will be true next quarter.
Technically speaking, the R2 number of .63 is the percentage of variability in Amazon's growth explained by eBay's growth, which is a loose testament to the notion that many things already impact eBay and Amazon differently. In addition, the 95% confidence range of the slope coefficient is -.04% to +1.52%. In other words, the degree to which Amazon's growth rate moves with eBay's could vary between those two values at the 95% confidence level.
Though topline is an important part of the equation, Amazon is probably less focused on the growth rate than investors. The company seems to be satisfied with being able to kick off enough operating cash flow to fund its capex requirements for the time being. After all, Jeff Bezos's favorite financial metric is free cash flow and the company is very clear that its goal is to 'optimize' free cash flow - a subtle difference from 'maximizing' free cash flow.
From the long-term investor standpoint, though an interesting stock to follow, I'm staying on the sidelines due to the unknowns around when it will stop trading on emotion and start trading on fundamentals.