Why Is One of the E-Commerce Leaders Cheap and the Other Is Not?

Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

eBay (NASDAQ: EBAY) is one of the internet’s most popular e-commerce destinations, whose business has evolved well beyond the early years as an auction site. In the past decade or so, eBay has become a leader in payment processing, marketing solutions, and even secondhand ticket sales. With shares having pulled back 12% from the highs reached last month, is the market giving us a second chance at a good entry point in eBay, or should we look elsewhere in the world of e-commerce?

eBay’s business today

As mentioned, eBay has greatly evolved and diversified its business over the years. As a result, revenues have climbed tremendously, up by about 700% over the last decade alone.

<img alt="" src="http://g.fool.com/editorial/images/52653/ebay-revenue_large.png" />

In addition to its flagship online marketplace and its 116 million active users, eBay also owns several other e-commerce businesses as a result of a series of acquisitions. Bill Me Later and PayPal are both owned by eBay and provide payment processing solutions. Gmarket and GSI Commerce provide e-commerce and marketing solutions. Shopping.com is one of the premier destinations for comparison shopping. Finally, StubHub, which eBay acquired for $310 million in 2007, is a leading ticket exchange website that has grown to about 15 million unique visitors monthly.

Future growth potential

EBay has stated that its goal is to become the world’s most efficient and abundant marketplace, and the recent acquisitions have been a big step toward reaching that goal. The company plans to continue to pursue acquisitions that it feels will provide more choices to both buyers and sellers.

In terms of eBay’s existing business lines, one initiative that I am particularly optimistic about is PayPal’s recently announced partnership with Discover Financial Services (NYSE: DFS). Under the terms of the partnership, Discover will issue physical debit cards linked to users’ PayPal accounts that can be used anywhere. I believe that this deal will be very beneficial to both companies, and to Discover in particular, who should be able to leverage PayPal’s enormous customer base to help in its quest to become one of the premier card issuers in the world. PayPal should see a huge increase in the volume of funds flowing in and out of their accounts, and that will mean more fees for eBay, who already makes about 40% of its money from PayPal.

The Numbers

Despite what I consider to be well above-average growth potential, eBay trades at a very reasonable price, especially after the recent pullback in share price. At 18.6 times 2013’s expected earnings of $2.75 per share, eBay is a bargain considering the growth that is projected. The consensus calls for earnings of $3.23 and $3.80 in 2014 and 2015, respectively, which corresponds to annual earnings growth of 17.5% and 17.7%. Also worth considering is the fact that eBay has well over $5 billion in net cash (cash minus debt), which makes eBay’s business itself even cheaper when you subtract cash from the share price.

The other big player in e-commerce, Amazon.com

The other major player in e-commerce is Amazon.com (NASDAQ: AMZN), which is about twice the size of eBay in terms of market cap. Amazon is by far the leading online retailer, with sales of almost $80 billion expected this year. I have read all kinds of commentary about how Amazon is overvalued and trades at a ridiculous P/E, but that is not why I don’t like Amazon as an investment.

After all, it is completely acceptable for a company to trade at a sky-high valuation if its growth (and expected profitability) justify it. For example, in 2005 when Google was a new publicly traded company, shares traded at a P/E of up to 89 times earnings. This was fine because Google’s revenue growth and more importantly, earnings growth, justified this.

Back to Amazon. A trailing P/E is meaningless on Amazon because the company actually lost money in 2012, but Amazon trades for 215 times this year’s projected earnings. While Amazon’s revenue growth may certainly justify this, their earnings growth and history of profitability (or lack thereof) does not. Amazon shows no clear pattern of earnings movement over recent history, and to be quite honest I find it amazing that the company has not figured out how to produce a decent amount of profit for its shareholders on the $61 billion in sales it had last year.

<img alt="" src="http://g.fool.com/editorial/images/52653/amzn-eps_large.png" />

Buy, Sell, or Hold?

eBay and Amazon have similar revenue growth, and are the clear undisputed leaders in e-commerce in the United States. The big difference is not only does eBay trade at a down-to-earth valuation, it’s actually quite cheap. I think this recent pullback is an excellent opportunity to get into the best e-commerce investment at a great entry point.

Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and eBay. The Motley Fool owns shares of Amazon.com and eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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