Don't Buy eBay Only Because It Is Cheaper Than Amazon

Jun.20.12 | About: eBay Inc. (EBAY)

People often compare eBay (NASDAQ:EBAY) to Amazon (NASDAQ:AMZN) to decide whether eBay is a good stock to buy. Some investors think it's a no-brainer to long eBay since its P/E ratio is only a fraction of Amazon's. They believe that in the long run, the market will correct itself by valuing the two e-commerce firms similarly. This way of thinking about relative value is dangerous for the following reasons.

A sound relative value analysis must compare apples to apples. Only part of eBay's and Amazon's businesses are of the same nature: hosting buyers and sellers on the site and taking cut from final sales. On eBay.com, buyers and sellers trade in an auction or fixed-price fashion. eBay charges a listing fee and takes a cut from the final sales. eBay reports this part of the revenue under Marketplace segment. Marketplace only accounted for 57% of eBay's total revenue in 2011. On the contrary, the core business of Amazon is to directly sell media and other goods to customers on Amazon.com. In addition to that, it also hosts third-party sellers on the site and charges commission from sales. This is the only part of business that resembles eBay.com. Amazon does not report the third-party sales figures and commission revenues. Instead, it reported that third party sellers sold about 39% of total paid units in 2011. Assuming that third-party sales has the same average price per unit as Amazon's direct sales, I estimate that the third-party business is only about 40% of Amazon's business.

Item

2011 Revenue in millions

Percentage of Total

Marketplace

$6,641

56.99%

PayPal

$4,412

37.86%

GSI and X.Commerce

$598

5.13%

Total

$11,652

 
Click to enlarge

Comment: data is aggregated from the revenue sheet posted on eBay's investor site.

Therefore, roughly speaking, only 57% of eBay and about 40% of Amazon are comparable. This disproves the claim that eBay is in the same business as Amazon but it is valued differently by the market.

Furthermore, Amazon's valuation is hyped. There are a lot of articles about why the lofty valuation of Amazon is unwarranted. This article by Robert Weistein is particularly insightful.

Lastly, based on Morningstar's data, although Amazon has a price-to-earnings ratio more than ten times of eBay's and a price-to-cash-flow twice as much as eBay's, eBay has a higher price-to-sales ratio than Amazon. This does not mean anything except that one cannot draw an unambiguous conclusion from the juxtaposition of eBay's and Amazon's valuation multiples.

 

TTM P/E

2011 P/E

TTM P/Cash Flow

2011 P/Cash Flow

TTM P/Sales

2011 P/Sales

eBay

16.8

12.3

17.9

12.2

4.5

3.4

Amazon

181.8

126.6

33.7

20.4

2

1.7

S&P 500

14

13.7

8.6

8.5

1.3

1.2

Click to enlarge

Given the reasons noted above, I think it is best not to benchmark eBay against Amazon. Instead, one should really focus on the growth potentials each business segment of eBay has. My DCF model suggests that eBay is fairly valued. Currently trading at $43.30 a share, the stock does not offer much margin of safety. Click here to view my analysis of eBay's fundamentals.

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