Amazon Vs. eBay — Which Is A Cheaper Stock To Buy?

In this article, we compare the fundamentals of eBay (NASDAQ:EBAY) and Amazon (NASDAQ:AMZN), vis-a-vis their market valuations to see which stock looks cheaper. Examining various factors that impact free cash flow  and thereby valuation — such as top-line, bottom-line, and capital expenditure indicators — we note that eBay seems slightly under-priced currently.

Though Amazon is clearly ahead of eBay in terms of factors including number of active buyers, transaction volumes, revenue growth, etc., its profitability levels are very low compared to eBay’s. The latter’s asset-light business model lends to high cash flows and margins; coupled with the rapidly growing payments business, eBay’s Marketplaces business’s outlook for revenue growth is quite strong, in our view. In addition, eBay’s low capital expenditure requirement allows significant cash for expansion and share buybacks. Stacking these fundamentals against relative valuation metrics, we believe eBay’s P/E and P/FCF ratios trade at a discount to Amazon’s metrics. We have summarized our findings in the below given info-graphic so that our readers can go through these comparisons easily.

See our complete analysis for eBay

Amazon Is Winning In Terms Of Market Share and Revenue Growth

In terms of revenue and market share growth, Amazon is clearly the winner against eBay. Amazon’s global active customer base of around 260 million, far outnumbers eBay’s 152 million buyers in its marketplaces segment. In terms of GMV, this translates into Amazon’s transaction volumes being around 50% greater than eBay’s volumes. The revenue of both companies is not directly comparable, as eBay’s marketplaces model primarily generates revenue through its take rate on transactions undertaken by third-party sellers and on net-payments facilitated by PayPal; in contrast, Amazon owns a large portion of inventory that it sells, and hence it derives gross revenues on the sale of these products; along with that, it also recognizes its share of revenues from sales generated by third-party sellers on its sites. As a result, this makes ratios based on sales (such as P/S and capex as a % of sales) less comparable between the two companies.

Considering the rapid growth being seen in the e-commerce market, we think that investors have assigned a significant weight on Amazon’s rapid market share growth in their estimate of the company’s intrinsic value, as they think that prices and margins could be improved later after capturing a dominant share of the market. The trailing twelve months (TTM) revenue growth for Amazon came in much higher at 21.5%, against eBay’s 9.3% and 13% sales increase in its marketplaces and overall business. We think the top-line outlook for Amazon is strong in the coming years, since it invests large portions of its profits on growth initiatives. The same outlook looks weaker for eBay taking into account the recent traffic-related challenges being seen on its websites. However, the sweet spot in eBay’s business is the rapidly growing payments business, and we think this segment could be slightly undervalued at this point.

However, eBay’s Business Generates Higher Cash Flows and Margins

Amazon’s competitive strengths seem to completely fade, when we compare its bottom-line results with eBay’s. eBay’s asset-light marketplace model generates high cash flows and margins, making it a much more attractive business from a value perspective. During the last twelve months, eBay posted EBITDA and free cash flow margins of 29.5% and 26.1% respectively — in comparison, the same ratios for Amazon were recorded at a dismal 5.2% and 1.3% respectively. Hence, even while eBay is losing some of its ground in the e-commerce business to Amazon, it’s much more successful in terms of creating value for shareholders.

We have projected Amazon’s profitability to rise slightly in our valuation model, as we think its management will now start focusing more closely on margins given the recent investor pressure. The increasing proportion of third-party sales in Amazon’s business could improve its margins. In addition, we expect Amazon to raise its prices where it can, rein in costs, and look at new investments more analytically from a risk/return tradeoff perspective in this outlook.

Capital Expenditure Requirement Is Lower For eBay

eBay requires lower capital expenditure (in absolute terms) in its business, since it does not have to invest heavily in warehousing, distribution centers, data centers, etc.  This reflect its marketplace model, as we noted, which is unlike Amazon. However, when seen as a % of sales, capex requirement seems to be higher for eBay, as its revenue gets understated (compared to Amazon) as discussed earlier in the article.

All In All, We Think eBay Is Cheaper From A Valuation Perspective

Taking into account, several relative valuation metrics including P/E, EV/EBITDA and P/FCF, we think that eBay represents a better value to the investor, as compared to Amazon at current pricing levels. Particularly, at around 17x forward earnings and 16x last twelve month free cash flows, eBay seems to be trading at a discount as compared to Amazon. In addition to relative pricing, our absolute valuation models also present a similar picture. Our valuation model for eBay results in a $67 price target for the company, which represents around 20% premium to its current market price. In comparison, our $303 price estimate for Amazon, is in line with the current market price.

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