Is This Internet Retailer too Expensive?

Marshall 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) has tumbled over 7.5% over the last week after reporting a mixed bag of earnings. Is this a great opportunity to snatch up this e-commerce company? (NASDAQ: AMZN), like eBay, is seeing increased competition from other online retailers. Many of the traditional retailers are now running e-retail sites. I think Amazon is expensive no matter how you slice it, from a P/E to EV/EBITDA basis.

Compared to Amazon, eBay indeed appears cheap; however, when stacking it up against other major Internet companies such as Yahoo! (NASDAQ: YHOO) and Google, it appears that eBay might not be that great of an investment.

From a valuation standpoint, eBay is in line with major Internet peers:

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p><strong>eBay</strong></p> </td> <td> <p><strong>Amazon</strong></p> </td> <td> <p><strong>Yahoo!</strong></p> </td> <td> <p><strong>Google</strong></p> </td> </tr> <tr> <td> <p><strong>Forward P/E</strong></p> </td> <td> <p>16</p> </td> <td> <p>74</p> </td> <td> <p>16.1</p> </td> <td> <p>14.9</p> </td> </tr> </tbody> </table>

Thus, would investors be better off investing in one of the other "high-growth" Internet stocks?

eBay is still one of the largest online retailers in the world, operating its famous auction marketplace and also running a payments segment (PayPal). Earlier this month, eBay managed to post EPS of $0.63, compared to $0.55 for the same quarter last year, on the back of a 14% rise in revenue.

However, the retailer guided down 2Q EPS expectations, projecting EPS between $0.61 and $0.63 on revenue between $3.8 billion and $3.9 billion, both below previous consensus forecasts of $0.65 EPS and closer to $4 billion in revenue.

eBay has been trying to hedge the market-share infringement. Yet, unlike eBay, Amazon struggles with profitability. However, there could be items in the works that weight its earnings more toward the higher-merging virtual goods, such as the recent announcement of its TV set-top box. Amazon also continues to squeeze margins by looking to open new distribution centers and expand internationally. 

Amazon’s first-quarter profit came in down 37% year-over-year due to these aggressive expansion plans. The e-commerce giant reported a profit of $0.18 per share, compared to $0.28 for the same time last year.

Heading into 2013, there were a total of 58 hedge long the stock, which includes a number of heavy hitters, such as top owner (by market value) Ken Fisher's Fisher Asset Management, with others being Tiger Global Management, Blue Ridge Capital and billionaire Ken Griffin's Citadel Investment Group.

eBay commands some of the highest hedge fund interest among all of the stocks listed, with a total of 81 hedge funds owning the stock going into 2013, which also happens to be a 14% increase from the previous quarter. A few of the funds owning the largest positions included billionaires Stephen Mandel and Steve Cohen. 

A better Internet investment

Yahoo! is a leading provider of web-based services and advertisements, while its search business continues showing signs of improvement. However, the competition is fierce given the two-tech powerhouses that currently own the number one and two spots in U.S. search market share: Google and Microsoft

Yahoo! is also increasing its mobile exposure. Yahoo! has little to no mobile- advertising revenue as of yet, but research firm ComScore believes that Yahoo's unique user share increased to 14.8% in November 2012 from 14.1% in March 2012. 

Yahoo!'s shift towards mobile is also a positive in the respect that accelerating mobile-use trends are expected to continue their rapid growth. ComScore believes that mobile users are expected to surpass desktop users in 2014. 

Yahoo! has also been refocusing its operations and shedding non-core assets in hopes of returning to its core businesses of search and mail. This includes the monetization of its Asian assets. Yahoo! sold off half its 43% stake in Alibaba for $7.1 billion. Yahoo!'s remaining stake in the leading Chinese-Internet company, Alibaba, could also prove to be even more rewarding if the company continues its stronghold on the market, currently owning more than 80% share of China's eCommerce market.

Yahoo! commanded more hedge-fund interest than going into 2013, with a total of 60 hedge funds long on the stock. Of course the most notable hedgie is billionaire Dan Loeb's Third Point, with approximately a $1.5 billion position that made up 26.6% of its total 13F portfolio. However, another notable hedge fund is the number-two owner and tiger cub Chase Coleman's Tiger Global Management, with 5.2% of its 13F portfolio allocated to the stock. 

Downside for eBay

eBay's true growth segment should prove to be its payment segment, but it can only carry the company so far, as it accounts for less than half of revenue. The possibility of increasing state taxes appears to also be an overhang for the company, compared to Amazon, which is actually pushing for such a tax. 

Thus, the other big headwind to keep an eye on is the fact that eBay could see weakness in its online-retail segment due to the potential addition of sales tax to its products. Congress is looking to pass legislation to require online retailers to charge sales tax. eBay sent this email to its members to garner support (below is an excerpt)

Congress is considering online sales tax legislation that is wrongheaded and unfair, and I am writing to ask for your help in telling Congress "No!" to new sales taxes and burdens for small businesses...This is a "big retail battle" in which small businesses and consumers have a lot to lose...if Congress passes online sales tax legislation, we believe small businesses with less than 50 employees or less than $10 million in annual out-of-state sales should be exempt from the burden of collecting sales taxes nationwide...that's what we're fighting for, and what big companies such as Amazon are fighting against.

The potential marketplace headwinds above fail to include the fact that eBay still lags its top competitor The other big headwinds that make me question the eBay valuation include the competition in the payments segment.

PayPal still remains the premier choice, but the likes of American Express are breaking into the market. American Express is going the acquisition route, while MasterCard has made a deal with Intel to include its PayPass technology with Intel's Identity Protection technology in Ultrabooks. 

Don't be fooled 

eBay appears to have a number of headwinds, while other notable Internet companies could offer investors better value over the interim. This includes the turnaround search company Yahoo!, which has a similar valuation and expected growth, but is managing to generate impressive returns for investors via a 28.5% return on investment, compared to eBay's 11%. Yahoo! also offers investors substantial less volatility, with a beta of only 0.9, compared to eBay's 1.4.

Marshall Hargrave has no position in any stocks mentioned. The Motley Fool recommends and eBay. The Motley Fool owns shares of 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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