ebay vs amazon case study

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• April 2012 (Revised October 2013)
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eBay, Inc. and Amazon.com (A)

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• | Language: English
• | Pages: 18

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Ramon Casadesus-Masanell

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eBay, Inc. and Amazon.com (B)

• eBay, Inc. and Amazon.com (B)  By: Ramon Casadesus-Masanell and Anant Thaker
• eBay, Inc. and Amazon.com (A)  By: Ramon Casadesus-Masanell and Anant Thaker

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eBay, Inc. and Amazon.com (A)

By: Ramon Casadesus-Masanell, Anant Thaker

This case has been designed to explore strategic interactions among organizations with different business models. The case considers how a competitor successfully challenged the incumbent in a…

• Length: 18 page(s)
• Publication Date: Apr 3, 2012
• Discipline: Strategy
• Product #: 712405-PDF-ENG

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This case has been designed to explore strategic interactions among organizations with different business models. The case considers how a competitor successfully challenged the incumbent in a platform market defined by strong network effects and high switching costs. The case allows students to assess the advantages and disadvantages of eBay's platform business model in comparison to Amazon's retail business model; to evaluate business model performance when value loops of two industry players interact; to analyze how Amazon expanded its business model and overcame barriers to entry in a platform market that generates winner-take-all effects for first movers; discuss how eBay can respond to the new competitive dynamic, exploring both tactical and strategic interactions; and assess the strategic implications of eBay's 2011 acquisition of GSI Commerce.

Apr 3, 2012 (Revised: Oct 30, 2013)

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Harvard Business School

712405-PDF-ENG

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In This Article:

On June 4, eBay Inc. (NASDAQ:EBAY) released a business update to make investors aware that the quarantine circumstances have caused their business to perform "significantly better than expectations," compared to their earnings report on April 29. Here is what it shared:

Warning! GuruFocus has detected 6 Warning Sign with EBAY. Click here to check it out.

EBAY 30-Year Financial Data

The intrinsic value of EBAY

Peter Lynch Chart of EBAY

Contrast this update with what the CEO of Amazon (NASDAQ:AMZN), Jeff Bezos, said about first-quarter results:

This got us thinking about business models and how profitable they can be. These companies are in e-commerce and have had the state governments of the U.S. shut down most of the physical locations of their competitors. The last three months were effectively two Christmas selling seasons spread from late winter into spring. Why is one of these business models responding so well to these circumstances? How profitable have these two platforms been in the past? Why does eBay sell for such a steep discount to Amazon?

To answer these questions, our Director of Research, Tony Scherrer, and I decided to become 28-year-old business school students at Harvard and do a case study. The study seeks to determine how profitable these business models have been over the last 20 years. To do this, we had to back out the GAAP profits Amazon received from Amazon Web Services (AWS) beginning in 2013. We then compared 20 years of e-commerce profits on a per-share basis.

Here is a snapshot of the last seven years on each:

Source: Amazon Annual Report, Bloomberg.

Source: eBay Annual Report, Bloomberg.

There are several obvious contrasts. First, eBay has generated more cumulative earnings per share for its shareholders over the last 20 years than Amazon has, sans its cloud business. Amazon's e-commerce business boasted 8 times more in revenue than eBay has over the last 20 years, but eBay was able to generate $25 in earnings per share from its revenue versus the $23 per share that Amazon could bring to its bottom line. Second, the operating margins on eBay have averaged 24%, versus Amazon's without AWS of less than 1% over the last seven years. Third, the average annual earnings growth for the past decade has been 4.4% for eBay versus 12.8% for Amazon (ex-AWS). It's notable that eBay has shrunk its share count by 35% since 2013 versus Amazon increasing its by 8%. The cash flow generated by eBay has allowed it to buy back ample amounts of its own stock.

Ben Inker, of Grantham Mayo Van Otterloo, has done strong work in showing that high price-earnings (P/E) stocks do a great job in predicting what companies will generate high earnings growth over the next 12 months. Unfortunately, it also shows that these same highly valued stocks are inversely related to forward stock price performance.

The eBay versus Amazon comparison may be a case in point for Inker's work. Current consensus opinion on Amazon's future long-term earnings growth rates is 26% per annum, consolidated. This compares to eBay's consensus of 12%. Benjamin Graham, in his revised formula for valuation published in " The Intelligent Investor" gives credit for high-growth companies. Using the forward expected GAAP earnings of $3.50 for eBay, Graham's formula implies intrinsic value of $91 per share versus its current price of $47.69 per share as of June 15. Using forward GAAP expectations of $18.86 for Amazon implies $927 per share intrinsic value against its current $2,550 trading level.

Over the last 20 years, eBay's consolidated e-commerce model has produced more earnings than Amazon's, but is a distinctly different business model. EBay is a virtual exchange where buyers and sellers meet. There is no membership fee, no inventory, no logistics and no grief. The industry analysts have 2020 consensus estimates for them to earn $3.50 after-tax profit per share, which means eBay trades at just over 14 times this year's profit. They are preparing to sell the classified advertising business for $8 billion to $10 billion and eBay has a market capitalization of $40 billion. They have $3 billion in cash and $7 billion of existing debt, while gushing copious free cash flow.

Amazon has two main components, AWS and e-commerce. It has a market cap of $1.27 trillion. Using a very healthy multiple compared to other high-growth digital behemoths, we estimate that AWS would be worth about $350 billion at 50 times after-tax profits. Readers can insert their own multiples here in picking whatever number they think is realistic. Remember, we are a couple of hypothetical 28-year-old business students at Harvard. If AWS is worth $500 billion, or around $1,000 per share of Amazon, then the stock market (Mr. Market) is pricing the e-commerce/fly wheel side of Amazon at $1,550 per share and putting a price-earnings multiple of 188 times on its 2019 GAAP earnings. Is eBay's business, which has produced the most e-commerce profit in the last 20 years, really worth that much less than the one which is adored by investors?

EBay has a business model far different from Amazon, which is drastically easier to run and maintain. It does not have to own and operate warehouses, delivery trucks, fleets of long-haul trailers or airplanes. EBay does not have to fight the ever-increasing call of antitrust and is not continually working against its own sellers as it develops and increases its own private-label brands. This may explain why eBay shrank its headcount from 17,700 a decade ago to 13,300 today versus Amazon's 24,300 headcount in 2000, which has exploded to today's eye-popping 798,000. Accordingly, eBay does not have any costs associated with Covid issues for warehouse workers, wage-creep or the other labor-oriented issues that Amazon has had to deal with lately. Therefore, Amazon's e-commerce business model is doomed to low profit margins as they pursue massive totally addressable markets.

We have been thrilled to own eBay for 12 years and like its prospects for the future. We are comfortable owning businesses based on free cash flow and profit growth. We will leave the Amazon stock in the "too hard" pile and tip our caps to those who it makes wealthy despite these contrasts.

Disclosure: The information contained in this missive represents Smead Capital Management's opinions and should not be construed as personalized or individualized investment advice and are subject to change. Past performance is no guarantee of future results. Bill Smead, chief investment officer, and Tony Scherrer, CFA, director of research and portfolio manager, wrote this article. It should not be assumed that investing in any securities mentioned above will or will not be profitable. Portfolio composition is subject to change at any time and references to specific securities, industries and sectors in this letter are not recommendations to purchase or sell any particular security. Current and future portfolio holdings are subject to risk. In preparing this document, SCM has relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources. A list of all recommendations made by Smead Capital Management within the past twelve-month period is available upon request.

(C)2020 Smead Capital Management, Inc. All rights reserved.

This Missive and others are available at www.smeadcap.com.

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Key Performance Indicators

Sales and revenue, profitability, valuation metrics, active user base, the bottom line.

• Fundamental Analysis
• Sectors & Industries

A Fundamental Analysis of Amazon and eBay

Emerging in the 1990s, both Amazon.com ( AMZN ) and eBay Inc ( EBAY ) facilitated the expansion of the global  electronic commerce  sector. Although Amazon and eBay are both multinational e-commerce corporations, eBay is solely a marketplace to conduct business, whereas Amazon is both a  marketplace and a retailer .

Formerly just an online bookstore, Amazon  expanded into a superstore  selling digital media and physical products. On the other hand, eBay transformed online marketplace auctioning from what was just collectibles to a significantly larger array of products. Additionally, through its acquisition of  PayPal , eBay revolutionized the profile of digital payments, spinning off the business in 2015, further supporting the growth of e-commerce payment platforms. In this article, we compare Amazon and eBay using various sales, profitability, and valuation indicators.

Key Takeaways

• Investors can evaluate companies like Amazon and eBay using key performance indicators such as sales, revenue, profitability, and valuation.
• For FY 2022, Amazon significantly outpaced eBay in sales, posting a trailing 12-month (TTM) revenue of nearly $514 billion in contrast to eBay's revenue of about $10 billion.
• Amazon had a loss of $2.7 billion in net income for the trailing 12 months vs. eBay's loss of $1.4 billion.
• Amazon's forward P/E ratio was also much higher at 41.32 vs. 9.87 for eBay.

The success of either Amazon or eBay is evaluated by looking at both companies'  key performance indicators (KPIs), which can be broken down into four categories:

• Sales and Revenue: Which company has a higher increase rate?
• Profitability: Which company has a higher  margin ?
• Valuation  Metrics : Which company is worth more?
• Active User Base: Which company has many new vs. existing customers?

For fiscal year 2022, Amazon had a trailing 12-month (TTM) revenue of $514 billion—an increase of 9.3% from $470 billion in 2021. In contrast, eBay's revenue totaled just $9.8 billion, less than in 2021 but an increase from 2020. Over the past three years, Amazon has significantly outpaced eBay in revenue growth, with an average annual revenue growth of 33.1% vs. 10.1%.

In 2022, Amazon experienced a net loss of $2.7 billion, while eBay reported a $1.3 billion loss. Both companies experienced decreases in net income in 2022. Amazon reported a three-year gross margin average of 41.8% compared to 75.7% for eBay.

Gross margin was calculated using cost of revenues (eBay) and cost of sales (Amazon), which is more accurate for service-based companies than cost of goods sold.

Meanwhile, three-year average operating margin levels are 2.2% and 27.2%, respectively, for Amazon and eBay. While both companies experienced shrinkage in 2022, eBay's was less than Amazon's in terms of net income growth (shrinkage)—Amazon's rate was -108.6%, and eBay's was -55.9%.

Valuation  metrics such as the  price-to-sales (P/S) ratio  and  price-to-earnings (P/E) ratio  essentially show which company's stock has earned a greater value for investors. At the end of 2022, Amazon's P/S ratio stood at 1.71, with eBay's at 2.42. Amazon's forward P/E ratio was much higher than eBay's at 41.32x versus 9.87x for eBay.

Amazon's debt-to-equity ratio for 2022 was 2.17, up from 2.04 in 2021. eBay is less leveraged, with a ratio of 1.72, down from 3.05 in 2021. Lower debt-to-equity ratios may or may not be significant; however, comparing the two company's ratios over 2021 and 2022 reveals that Amazon increased its debt level significantly while experiencing a net income loss, while eBay decreased its total debts while experiencing a loss of net income.

Amazon was the most popular e-commerce marketplace in mid-2023, with over 2.8 billion unique monthly visits . eBay was well behind Amazon in terms of visits, with 624.2 million.

Is It Better to Buy on Amazon or eBay?

eBay offers you a direct connection to the seller and allows sellers to auction their items. This caters to consumers who enjoy these features. Amazon makes transactions feel as if you're buying from it rather than from sellers. Protection levels vary, so it's best to make sure you know how each company guarantees your purchases.

Is It Safer to Buy on Amazon or eBay?

Both companies have safeguards in place to protect customers. Because they each have different models, it's best to become familiar with each one and decide which is safer for you.

What Is the Main Difference Between Amazon and eBay?

eBay is more of an auction house and marketplace, while Amazon functions more like a marketplace and retailer.

Amazon is by far the bigger corporation, dwarfing eBay in sales, income, and user activity. It has a significantly higher forward P/E, showing greater room for growth. On Aug. 28, 2023, Amazon traded $133.26 versus $43.59 for eBay.

Amazon has a definite lead over eBay regarding sales and revenues, but eBay leads in margins. The valuation metrics paint an interesting story for the two giants, with the ratios reflecting that Amazon's shares are projected to earn more, but eBay's shares led over 2022. Debt levels might be problematic if the companies continue to generate income losses, but quarterly reports for Q1 and Q2 for both indicated two-quarters of positive net income—a reflection of their financial strengths during tumultuous times.

eBay. " eBay Inc. Board Approves Completion of eBay and PayPal Separation ."

eBay. " eBay Inc. | Form 10-K ," Page 80.

Amazon. " Amazon.com, Inc. | Form 10-K ," Page 67.

Amazon. " Amazon.com, Inc. | Form 10-K ," Pages 67, 61.

eBay. " eBay Inc. | Form 10-K ," Pages 80, 37.

eBay. " eBay Inc. | Form 10-K ," Pages 80, 37, 60.

Amazon. " Amazon.com, Inc. | Form 10-K ," Pages 67, 61, 66.

Yahoo Finance. " eBay Inc. Statistics ."

Yahoo Finance. " Amazon.com Statistics ."

eBay. " eBay Inc. | Form 10-K ," Page 58.

Amazon. " Amazon.com, Inc. | Form 10-K ," Page 39.

SEMRush. " eBay.com ."

SEMRush. " Amazon.com ."

Yahoo Finance. " eBay Inc. Price Quote ."

Yahoo Finance. " Amazon.com Price Quote ."

eBay. " eBay Inc. ," Download 10-Qs. Page 6.

Amazon. " Amazon.com, Inc. ," Download 10-Qs, Page 5.

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