Amazon Grossly Overvalued, eBay Grossly Undervalued

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 |  Includes: AMZN, EBAY, MELI, OSTK
by: The Ethical Investor

According to Forrester Research, U.S. e-commerce sales are projected to grow at an annual rate of 9.6% and reach $279 billion by the year 2015. Analysts on average expect the catalog and mail order industry to expand at a long-term growth rate of 14%. This bodes extremely well for market leader Amazon (NASDAQ:AMZN) and other components of the industry. In this article I will compare Amazon with some of its major competitors and/or similar companies and determine whether investing in these companies makes sense at current prices. The companies selected for analysis are:

  1. Amazon.com, Inc.
  2. eBay, Inc. (NASDAQ:EBAY)
  3. Overstock.com, Inc. (NASDAQ:OSTK)
  4. MercadoLibre, Inc. (NASDAQ:MELI)

eBay and Overstock.com are household names, the only relatively unknown on the list is MercadoLibre. MELI is the often called the eBay of Latin America (which I do not believe is the case as the business model is slightly different and is more comparable to Amazon than to eBay). MELI is a $3.6 billion company offering services to users to buy, sell, pay and collect e-commerce transcations on mercadolibre.com.

As part of my analysis, like always, I evaluated the historical growth rates in revenue, net income, and book value. Next, I examined the cash conversion cycle, and gross and operating margins to measure efficiency in operations. I also looked at the return on invested capital to evaluate how well the companies were using their financial resources to generate returns. Finally, employing a very subjective analysis, I ranked Amazon by comparing it to the other companies. The growth rates, operational characteristics, and my rankings for these parameters are presented below.

Historical Revenue Growth Rates:

Company

10 Year

5 Year

1 Year

Ranking

AMZN

27%

32%

40%

1

EBAY

28%

15%

5%

4

OSTK

39%

6%

24%

2

MELI

-

51%

25%

3

Click to enlarge

Historical Income Growth Rates:

Company

10 Year

5 Year

1 Year

Ranking

AMZN

-

26%

28%

3

EBAY

35%

11%

-25%

4

OSTK

-

-

75%

1

MELI

-

95%

70%

2

Click to enlarge

Historical Book Value Growth Rates:

Company

10 Year

5 Year

1 Year

Ranking

AMZN

-

92%

27%

1

EBAY

25%

10%

9%

2

OSTK

9%

-22%

179%

3

MELI

-

-

50%

4

Click to enlarge

Future Earnings Growth Projections:

Company

Next Yr

Next 5 Yrs

Past 5 Yrs

Ranking

AMZN

66%

26%

24%

2

EBAY

16%

13%

8%

4

OSTK

54%

20%

0%

3

MELI

32%

29%

95%

1

Industry

14%

14%

Sector

9%

16%

S&P 500

12%

11%

Click to enlarge

Cash Conversion Cycle:

Company

10 Year

5 Year

TTM

Ranking

AMZN

-35

-34

-16

2

EBAY

-13

-6

-5

3

OSTK

1

-17

-4

4

MELI

-50

-74

-273

1

Click to enlarge

Gross and Operating Margins:

Company

Gross Margin %

Operating Margin %

Ranking

Current

5 Year Avg

Current

5 Year Avg

AMZN

22.5

22.54

2.5

4.22

2

EBAY

70.9

74.68

20.5

19.04

3

OSTK

17.2

16.42

0

-3.28

4

MELI

76.3

78.42

33.4

25.84

1

Click to enlarge

Return on Invested Capital:

Company

10 Year

5 Year

TTM

Ranking

AMZN

20%

18%

10%

3

EBAY

11%

11%

10%

2

OSTK

-26%

-16%

-3%

4

MELI

29%

31%

39%

1

Click to enlarge

Using the rankings above, I summarized the scores to come up with an overall ranking. The table that follows presents the summary rankings for the five selected companies.

Company

Symbol

Ranking

Score

Amazon

AMZN

2

2.0

eBay

EBAY

4

3.1

Overstock.Com

OSTK

3

3.0

MercadoLibre

MELI

1

1.9

Click to enlarge

AMZN is clearly better than its stateside rivals and is a close second to up-and-comer Latin American rival in MELI. Surprisingly, eBay and Overstock.com have a similar score. I believe that eBay is a way better run company than OSTK and should have been at a different level than OSTK.

In the next step, I estimated the fair value for AMZN and the three other firms using relative valuation. It should be noted that the P/E estimates were developed using historical analysis of the earnings multiple from the last 10 years. The analysis and results are shown in the table that follows:

Valuation

AMZN

EBAY

OSTK

MELI

Current EPS

$1.90

$1.37

$-0.06

$1.61

EPS Growth Rate

26%

24%

20%

29%

Future EPS (5 Yr)

$5.93

$4.07

$0.87

$5.75

Expected P/E

39

15

14

29

Price 5 Yrs Out

$231.25

$61.12

$12.14

$166.79

Unlevered Beta

1.22

1.22

1.22

1.22

D/E Ratio

0%

9%

106%

2%

Current Tax Rate

35%

35%

35%

35%

Levered Beta

1.22

1.29

2.06

1.24

Risk Free Rate

2%

2%

2%

2%

Risk Premium

6.50%

6.50%

6.50%

9.50%

Size Premium

-0.36%

-0.36%

0.62%

0.97%

Cost of Equity

9.6%

10.0%

16.0%

14.7%

Fair Value

$ 146.43

$ 37.90

$ 5.77

$ 83.98

Current Price

$ 179.34

$ 31.20

$ 6.97

$ 83.70

Percentage Overvalued

18%

-21%

17%

0%

Click to enlarge

As shown above, AMZN is significantly overvalued and is due for a further decline of 18%. Likewise, OSTK is grossly overvalued and makes a good short candidate. MELI, the best company on the list, is fairly valued in my opinion. I would look to open a position in MELI if and when the stock trades at $67 a share.

eBay is the only company on the list trading at a discount and makes a good long candidate at these levels.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: Kindly use this article for information purposes only. Please consult your investment advisor before making any investment decision.