Choosing Amazon Over eBay

I've been asked by several readers why I'm writing more positive posts about Amazon (AMZN) than I do about eBay (EBAY), so I thought I would list the reasons. I still believe eBay can be a fantastic business again but I don't see that turnaround anytime in the near future.

Why I Prefer Amazon over eBay

In regards to management:

• Amazon thinks long-term while eBay managers, manage by the quarter.
• Amazon is entrepreneurial while eBay is a consultancy.
• Amazon takes chances while eBay manages risk.
• Amazon is a technology company while eBay thinks they are a technology company.
• Amazon is proactive while eBay is reactive.
• Amazon manages the business while eBay manages the stock.
• Amazon takes responsibility for their business while eBay deflects responsibility.

In regards to online sellers/merchants:

• Amazon is easy to manage (from the seller perspective) while eBay requires so much more effort.
• Amazon customers are low maintenance while many eBay customers are high maintenance.
• Amazon generates higher ASP's then eBay for the same items.
• Amazon makes their money on sales success while eBay makes their money regardless.
• Amazon understands retail while eBay ... doesn't.
• Amazon is growing while eBay is floundering.

eBay is still a huge marketplace, where you can find just about anything, but many professional sellers are changing their eBay plans. For many eBay sellers, eBay is becoming more of a customer acquisition or a liquidation channel.

Amazon is not perfect, I'm sure, but I much prefer the way they conduct business.

Just my 5 cents!

Disclosure: none

Comments

[kite:]

Absolutely

2008 Jan 13 10:15 PM

[Dinah Balk:]

Couldn't have said it better myself! While Meg has been trolloping around the countryside hand in hand with Mitt for over 6 months, Donahoe has taken the site to an all time low. His "buyer experience" plan has caused ebay to be avoided at all costs due to ongoing guinea pig tests members cannot opt out of & the site has become one mass of bad script. Just this week ebay techs dumped a ton of bad script into the site & now no one can find IT because SEARCH is frozen. Store owners have also discovered one of their store links in item descriptions now reads STORE DOES NOT EXIST when a buyer clicks on it. Is this any way to run an auction site or has ebay moved to the back of someone's garage?

Why doesn't the Board vote both Meg & Donahoe OUT?

2008 Jan 13 11:09 PM

[Tom B:]

Wouldn't touch AMZN. High P/E; low profit margins; making stupid mistakes lately (Unbox, MP3 download, Kindle Reader).

Don't like Ebay, either, but that's mostly because every third spam in my inbox is about how I have to log in with my password right now to my non-existent Ebay account.......

2008 Jan 14 09:05 AM

[DealMan:]

I don't know how you can say Ebay is floundering.

Best last 4 qtrs.

User Experience is better than a year ago

Classifieds is growing at a rapid clip

PayPal is growing beautifully and international growth is terriffic

Even Skype had great growth this qtr.

StubHub was a huely successful aquisition

I won't say Ebay is perfect but they have a powerful business model and they are making solid progress on all fronts.

2008 Jan 14 02:32 PM

[Yawn:]

Of course Randy would choose amazon as he is a failed exbay seller!

Ask Randy if he has any investment position on Amazon. Of course not! LOL

2008 Jan 14 10:11 PM

[Yawn:]

Randy I couldn't help but notice that your analysis is ALL qualitative commentary. One you thing you forget which is equally important is that the quantitative tell the other half of the story.

Worst Stock for 2008: Amazon.com


So the old year is over, and good riddance, right? Now you want to know how to avoid repeating last year's mistakes in the new year. You want to know which stock to avoid in 2008. Well, I've got just one word for you: Amazon.com (Nasdaq: AMZN). Or does the "dot-com" part count as a second word?

No matter. Whatever the number of words, Amazon is a zero in my book. (Pun intended.) After more than doubling in 2007, this stock has had its time in the sun. But miracles seldom repeat, and high-priced miracles in a recessionary economy are rarer still.

The bull case
Before laying waste to Amazon, let's give credit where credit is due -- this is one superb company. Over the five years since we picked it to join the Motley Fool Stock Advisor portfolio, Amazon has more than quintupled in value. That doesn't happen by accident. It happened because Amazon has made itself the undisputed king of e-commerce. When you want to buy something on the Web, you make Amazon.com your first stop. Full stop.

Sure, bargain hunters like Yours Fooly tend to use that stop more for checking product reviews and finding a ceiling on what an item should cost. We then quickly float on out of Amazon, to find better deals at Overstock.com (Nasdaq: OSTK), Drugstore.com (Nasdaq: DSCM), and eBay (Nasdaq: EBAY). Or we'll hop in the family roadster for a price check at Costco (Nasdaq: COST) or Wal-Mart (NYSE: WMT).

If, like me, you put profits high on your stocks wish list, then just take a gander at these numbers:

Trailing 12-Month (TTM) Sales
Operating Margin (TTM)
Price-to-Sales Ratio

eBay
$7.2 billion
25.4%
5.6

Amazon.com
$13.1 billion
4.4%
2.7

Drugstore.com
$436.1 million
(3.2%)
0.7

Overstock.com
$762.9 million
(7.7%)
0.4

Source: Capital IQ (a division of Standard & Poor's) and Yahoo! Finance.
Which of these things is not like the others?
When it comes to e-commerce stocks, the undisputed king of the hill is not Encyclopedia Amazonica, but auction-star eBay. It's got the second highest sales. The fattest operating margins. The highest price-to-sales ratio.

Huh? Wait a minute.
I know what you're thinking. If I don't like Amazon because it's a "high-priced miracle," then what am I doing praising eBay, when its price is even richer?

Well, the answer is that unlike Amazon, eBay deserves its lofty multiple. And, for different reasons, the unprofitable also-rans Drugstore and Overstock deserve their miserly multiples. You see, unlike Drugstore.com, Overstock.com, and Amazon.com, eBay carries no inventory. As a pure play e-commerce "facilitator," it doesn't need to. Every incremental additional sale eBay adds to its income statement brings essentially pure profit, as the company plays gatekeeper and toll collector on the E-Commerce Superhighway.

In contrast, Amazon hasn't just abandoned its founding raison d'etre -- selling stuff electronically, while letting the actual makers of the stuff handle distribution. It's actually becoming steadily more bottom-heavy on its balance sheet over time. If you examine Amazon's balance sheets for the past five years, I think you'll be surprised to learn that while sales have grown mightily -- up more than 200% since fiscal 2002 -- the inventories Amazon must carry to facilitate those sales are growing even faster, weighing in nearly four times heavier at last report than they were averaging five years ago.

Starting over from scratch
Judging from its actions, Amazon recognizes this problem, too, and is taking steps to address it. As fellow Fool Alyce Lomax so ably argued last summer, Amazon's throwing an awful lot of spaghetti at the walls lately, in an attempt to make something less inventory-dependent stick. A new payment service was one. Amazon Unbox was another.

Most notably, the firm's new Kindle e-book seems designed to reverse Amazon's flow back toward Jeff Bezos' original intent. Selling downloadable "virtual books" will, by definition, require less inventory -- at least of books, if not of Kindles. And maybe this gambit will work. But judging from the stagnant performance of fellow virtual-book seller Audible.com (Nasdaq: ADBL) over the past couple years, I have my doubts.

Foolish takeaway
So you see, there are many reasons to shy away from Amazon.com stock in the New Year. But for me, the biggest reason is the price.

I don't see any need to go into detail on this one. You see Amazon's trailing price-to-earnings ratio of 97, its 23% projected five-year growth rate, and its PEG of close to 4.0. You look at those numbers, and you know instinctively: It costs too much.

Listen, I know you love Amazon. And if you own it, I know you treasure your gains of yesteryear. But now, it's time to face facts and own up to the obvious. If you agree with me, go to Motley Fool CAPS, and admit that at this price, Amazon is certain to underperform in 2008.

2008 Jan 14 10:22 PM