The Deadly Dot-Com Stock Of This Decade, Buy This Stock Instead

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

If you are looking to buy into a recovering economy, you may naturally be considering eCommerce stocks. The problem is that they have risen significantly -- sometimes doubling or nearly tripling in value for the year to date -- that much of the upside has dissipated. I thus encourage investors to look around the edges and not go for companies that can appreciate meaningfully off of lower multiples and earnings growth. Below, I review 3 stocks in the business with differing risk/reward.

Amazon (NASDAQ: AMZN): The Dot-Com Stock Of The '10s

Amazon is the dot-com stock of this decade for several reasons. After rising around 50% for the year to date and hitting an all-time high, Amazon is now valued at 146.6x forward earnings. But with the stock just 7% below its aggressive price target on the Street, the bulls may be in for shock. Even if Amazon doubled EPS annually over the next 5 years, a 10.8x multiple would take the stock to $293.28 by 2016. In present terms, this means a price target of $182.10, which is at around a 30% discount to the prevailing price. So, even under absurdly strong growth, Amazon would be substantially overvalued.

Of course, over the last 5 years, Amazon has showcased strong growth - but nowhere close to a y-o-y annual doubling. EPS has grown by only 25% annually over the last 5 years. This growth, however, can't long outperform industry trends. Domestic holiday eCommerce sales have only risen 13% y-o-y, which is well below the 17% forecast from comScore. ShopperTrak has also had to cut its holiday sales forecast. Moreover, results have been weaker than expected for Kindle Fire with "supply chain checks indicat[ing] poor demand". In fact, Pac Crest has decreased his sales forecast by 2 million units to 6 million. To put this in perspective, around 172.4 million tablets are expected to be sold in 2013. But new products, such as the announcement of a smartphone launch in 2Q13 or 3Q13 and Instant Video service á la Netflix, have caused multiples to already expand from stratospheric levels.

Penetration into cloud will also help drive the investor exuberance. Its Cloud player will now be available for Samsung Smart TVs and Roku players, which position it well to capture the "Apple TV" chatter. The CEO of Apple has spoke about feeling like he was going back decades when he turns on TV--the thought of a "secular innovation" is just what Amazon needs to justify its lofty multiples. But, until then, the fundamentals don't pass the smell test. Return on invested capital--the source of all value creation--stands at 7.7%, which is a massive 600 bps below the industry average. It actually means that the company is burning value, since the weighted average cost of capital stands at around 10%. The company is also less liquid than the competition with a current ratio of 1.2x versus the 1.8x industry average. Even if you blame the companies high earnings multiples on low margins, the company is still trading at 2x sales versus a 0.2x industry average. If Amazon were to trade at Overstock's P/S ratio, it would be worth $9.6 billion--or more than 90% less than the current valuation.

eBAY (NASDAQ: EBAY) Vs. Overstock.com (NASDAQ: OSTK)

Overstock jumped 16.3% off of strong third quarter $255 million in revenue, which represented a 7.7% y-o-y growth. And despite market share erosion to Amazon, the company's bottom-line benefited from a 220 bps y-o-y expansion in margins. With the stock nearly triple where it stood from the 52-week low, much of the upside may have already been captured into the stock price. This certainly appears to be the case in light of the company's 16.9x forward earnings multiple. Fortunately, there are attractive alternatives.

Though eBay has hit its all-time high after rising 73.2% from the 52-week low, shares still manage to look cheap. Analysts forecast EPS growing by 14% annually over the next 5 years, which, in my view, is much too low, since the company grew by a rate of 25.5% in the last half decade. Assuming expectations are met, 2016 EPS will come out to $4.06. At a multiple of 17x, this translates to a future stock value of nearly $70 for 7% average annual returns. By itself, this does not make eBay worthy of an active investment; however, I think there are several upside variables.

PayPal has a sharp growth curve ahead, and it has shown a greater interest in recent months to step up efforts in serving "unbanked" consumers. The introduction of prepaid cash cards with availability in more than 30,000 domestic retail outlets, for example, represents a step in the right direction. Customers in 7 countries can now open up PayPal accounts that are linked to local banks, and the division now expects to double its eCommerce share the EMEA region within the next three years. Mobile is also a major opportunity that will help drive this growth. According to comScore, roughly half (42%) of the eBay's unique domestic visitors in September relied on mobile devices and 18% were mobile-only. So, in short, if eCommerce sales could rise 15% in the third quarter, eBay, with all of its catalysts, should be able to see a much higher growth rate than 14%. I encourage buying to take advantage of this predictable earnings surprises.


TakeoverAnalyst has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com. Motley Fool newsletter services recommend 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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