Over the past few years it has displaced several segment leaders and is making others, like Best Buy (BBY), Barnes & Noble (BKS) and Sears (SHLD), struggle to keep afloat.
Despite its success, this giant´s stock is clearly overvalued, at 2.1x its sales and 16.3 times its book values (compared to the respective 1.5x and 5.2x industry means). So, trading above average valuations while boasting negative margins and returns, is this stock still buy? Or should you listen to the fundamental investor inside of you and stay away from this company with discouraging financials?
Opinion amongst investment gurus seems quite divided. While some like Tom Russo (Gardner Russo & Gardner), John Hussman (Hussman Economtrics Advisors) and Jim Chanos (Kynikos Associates LP) sold out their stakes in the company during the second quarter of 2013, others like Renaissance Technologies LLC´s Jim Simons and Passport Capital´s John Burbank added substantial amounts of stock to their portfolios. So, let´s try and sort out this disagreement by looking into Amazon´s prospects, and comparing them with eBay´s outlook, in order to elucidate which one stands as the best investment option for the long-term.
Low-Cost Operations, Network Effect and a Focus on Customer Service
“Amazon's low-cost operations, network effect, and laser focus on customer service provide it with sustainable competitive advantages that traditional retailers cannot match; this should yield additional market share in coming years” (Morningstar).
Its low-cost operations structure might be Amazon’s main advantage over its peers. By avoiding the need of physical retail presence, the company enjoys of several benefits, from tax advantages to the possibility of pricing its products below its peers while still generating decent returns. The company’s superior customer service has also helped it retain and gain customers over the past few years, and has led to a customer base expansion rate well above its peers’.
However, some of these advantages are being jeopardized, as the debate about online sales tax collection heats up in the U.S. Outside the U.S., Amazon faces similar risks, as governments world-wide are tending to reassess their online commerce laws. Additional downside threats can be found; for example, the company´s exposure to volatile discretionary spending patterns makes future results hard to predict, while its expansion into non-core businesses like cloud computing, could distract management or lead to inadequate capital-allocation decisions (Mornignstar).
Finally, the recently released Login and Pay system seeks to monetize the websites high traffic (more than 200 million users). This will certainly affect Amazon’s fundamentals, but the direction of the impact is quite unclear yet. Competing with eBay’s PayPal and Google’s (GOOG) Wallet, getting people to choose Login and Pay won’t be easy.
A Better Option
After reporting solid results on its third-quarter (an increase of more than 14% in revenues and double-digit growth in PayPal and Marketplaces active users), eBay’s outlook seems quite encouraging. Unlike Amazon, valuation is also attractive, at 3.2 times its book values and 26.5 times its earnings (versus the 50.8 x industry mean). Also opposite to its main competitor, eBay’s margins, returns and debt levels are substantially above its peers’.
|Rev Growth (3 Yr Avg)||17.3||4.3|
|Net Income Growth (3 Yr Avg)||3.0||0.4|
|Operating Margin % TTM||20.6||5.5|
|Net Margin % TTM||17.7||2.9|
Going forward, analysts expect eBay to deliver average annual EPS growth rates around 14%-15%, about 25% above its peers’ mean. One of the main catalysts behind these projections is international expansion. With more than half its revenue already coming from overseas markets, expansion opportunities abound, especially as internet penetration increases in emerging markets and populations become younger and more urban.
Furthermore, eBays payment system and main growth driver, PayPal, has been expanding –and should continue to do so- both in the online and offline arenas. It now accounts for more than 40% of the company’s revenue. Also, increasing mobile adoption rates and huge international expansion potential position PayPal to become one of the main payment processors, especially within the mobile space -a market estimated to be worth $1 trillion by 2017.
Even though competition will grow, especially for PayPal, eBay’s future looks good, and the current stock price opens a good opportunity to chip in, joining Eric Mindich (Eton Park Capital Management, L.P.), Manning & Napier Advisors, Steve Mandel and Jim Simons, some of the investment gurus that have bet on the company lately.
Amazon’s Unclear Future
While Amazon faces several uncertainties going forward and its fundamentals are quite worrying, eBay offers an amazing growth story and potential, and a great balance sheet, with plenty of cash and very little debt. At the current price point, an entry point is available for long-term investors.
Disclosure: Damian Illia holds no position in any stocks mentioned.
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