Move Over Amazon, eBay is a Better Investment
Soroush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In a way, the online retailing space is like the folkloric feud between the Hatfields and the McCoys. On one side, there’s Amazon.com (NASDAQ: AMZN), the world’s highest grossing e-commerce company that generated nearly $50 billion in revenue last year. AMZN is a favorite of many investors, as its dominant market position and trendy cloud computing operations have tech bulls in tears of joy. Much in the way that the McCoys battled the more affluent and well-equipped Hatfields, eBay (NASDAQ: EBAY) prides itself on using creative business tactics to outmaneuver the larger Amazon.
Whether it’s the continued development of the company’s handy PayPal feature, or its partnerships with traditional ‘brick and mortar’ retailers, eBay has innovated its competitors into the ground over the past year. The markets have taken notice, as shares of EBAY are up over 35 percent since last summer, which is more than thrice the return generated by AMZN, Google (NASDAQ: GOOG), Overstock.com (NASDAQ: OSTK), or Yahoo! (NASDAQ: YHOO).
Since the early 2000s, eBay has been a consistent second place finisher to Amazon in the global e-commerce market share rankings, and it looks as though the company believes in the old Ricky Bobby adage “if you ain’t first, yer last”. See, while Amazon has spent the past year developing an uncompetitive cloud-computing platform and a too-funny-to-make-up stab at original TV programming, eBay has been busy diversifying its retail operations.
At the beginning of 2011, it launched GiftsNearby, an online platform that provides customers with information on product availability in their local markets. Through partnerships with traditional retailers like Best Buy (NYSE: BBY), Target (NYSE: TGT), and RadioShack (NYSE: RSH), GiftsNearby easily gives eBay the best foothold in the ‘brick and mortar’ arena compared to Amazon and its other web-based competitors. In addition, eBay is arguably the most attractive online retailer from a bill-paying perspective, as the ever-popular PayPal is uniquely designed to serve the site’s customers. Yes, users of AMZN, OSTK and the privately held Craigslist can use PayPal for purchases, but the service is oodles more streamlined on eBay. In today’s world of über-short attention spans, this is a definite advantage.
From a valuation standpoint, it is safe to say that shares of EBAY are undervalued compared to AMZN and the stock’s own historical averages. With a Forward P/E – a financial ratio measuring how investors value future earnings – of 84.2 times earnings, AMZN is trading significantly higher than the online retail industry’s average (29.9X). As mentioned in this article, it seems that the markets are valuing Amazon like a tech company, even though 97 percent of its revenues come from retail-based operations.
In comparison, we can see that EBAY is currently sporting a much more moderate Forward P/E of 15.2X. In fact, over the past decade, eBay’s earnings have historically traded at a 230.9 percent premium over those of the S&P 500 at large. This year, shares of EBAY are much cheaper, trading at just a 3.9 percent premium. Looking to eBay’s historical earnings, this undervaluation is not warranted, as it has grown its EPS by 21.8 percent on average over the past three years. In contrast, Amazon has seen its EPS shrink by -2.8 percent each year over this same time period. Using a moderate year-ahead EPS forecast of $2.40 in conjunction with the industry average P/E, we can set an EBAY target price of $71.76 by next summer. Heck, even on the low-end of analyst estimates, fairly valued shares would eclipse $60 a share, making a 50 percent return over the next year a real possibility.
Moreover, eBay has tended to its cash hoard quite nicely compared to Amazon, as its free cash flow grew by 14.2 percent in 2011. Amazon’s FCF actually shrank by -16.8 percent in the past year. Sticking with the trend, it seems as though the markets have not realized this truth. In fact, EBAY’s P/CF ratio (17.0X) is currently half of AMZN’s (32.2X), and below its own 10-year historical average of 18.0X.
On the whole, the global e-commerce market is expected to grow by an average 13.5 percent over each of the next four years, reaching a value of $1.4 trillion by 2015. Through eBay’s advantageous ‘brick and mortar’ partnerships and its PayPal advantage, it looks primed to ride this trend. More importantly, the company looks undervalued – especially in comparison to Amazon – when using every major earnings metric in the book. WealthLift’s Sentiment Index currently rates EBAY as a strong buy, with an overall positive sentiment from 84.62 percent of investors. For value hunters and growth enthusiasts alike, now may be the best time to take a long position in the stock.
WealthLift has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com, Best Buy, Google, and RadioShack. Motley Fool newsletter services recommend Amazon.com, eBay, Google, and Yahoo!. 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.If you have questions about this post or the Fool’s blog network, click here for information.