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eCommerce Stock Pair Trade: Amazon vs. eBay

by: Vlada Kynsky September 07, 2008 | about stocks: AMZN / EBAY    

Vlada Kynsky

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Pair trading is an especially suitable approach if you are not sure if the market will go down or up, but you are "sure" about the valuation of stock pairs from the same sector. The trade is to sell the outperforming stock and buy the underperforming one.

I have already posted pair trading analysis Intel vs. AMD and this is my next analysis for a technology stocks pair.

The biggest online marketplaces are Amazon (AMZN) and eBay (EBAY).

I will start with global picture and the trend. Ebay started the business as a pure online auction portal while Amazon is running a direct sales model, kind of "buy it now". Amazon is the king in fixed-price listing and Ebay is moving in this direction.

The latest Ebay's Gross Merchandise Volume [GMV] shows an increase of 8%, well behind the previous 4 quarters (12-14%). A sluggish core auction business is the main reason why this is forth year with negative return on Ebay's share price. In addition, Ebay has been punished for Skype writedowns and unsuccessful integration. On the other hand, these secondary business units have posted significant revenue growth - more than 30% for PayPal and more than 60% for Skype.

Ebay made recent changes in fee structure. On an item below $25, Ebay has a commission of 8% and Amazon 15%. But Amazon listings last longer and Amazon doesn't charge a fee for unsold items as Ebay does.

Amazon has double the total sales ($17.13 bln USD) vs. Ebay ($8.46 bln USD) but total income is almost the same - $588 mil. vs. $515 mil. Ebay therefore shows a stronger profit margin - with 6.09% vs. Amazon's 3.47%. But the trend for profit margin is improving for Amazon (sales vs income growth; 39% vs 59%) and stays unchanged for Ebay (21% vs 22%).



Ebay's share price is currently traded at 11 times cash flow compared to Amazon price with 30 P/CF ratio. I do believe that downtrend is over and Ebay is now a good value stock for short term investment. It looks cheaper than Amazon. Nevertheless, long term prospects seem to be better still for Amazon.

Disclosure: Author doesn't own any shares of Ebay or Amazon.

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This article has 16 comments:

  •  
    Sep 07 05:29 AM
    Ebay is facing a fundamental business model problem now. It's management tried to abandon its core business and move toward brick-and-mortar Amazon model. The company is not prepare to handle the logistic of merchandising as Amazon has been doing. Remember that Ebay was built by a sellers/buyers community, not by a group of management team. It has alienated many of its sellers and buyers. Forced Payapl and forbidding payment by check, money order, and direct bank transfer has driven many ebay sellers to abandon the site. Investors should not have any more illusion on ebay. It will be another Xerox!
    Reply
  •  
    Sep 07 07:45 AM
    "I do believe that downtrend is over and Ebay is now a good value stock for short term investment."

    You believe this because of what?? I believe the downtrend is only about to free fall from an enormous cliff with JD's new recruitment of big box retailers they are moving in in October - who just like Buy.com will be enjoying the welfare paid for by real eBay sellers- eBay ride and get top placement because they don't have to preform to the new "DSR- whipping board". So the sellers who really have the variety are going to be swamped out by big box companies taking a free ride off the backs of the seller's they are literally stepping on. I don't even know how many of us will make it to November let alone to 2009. Does that mean the big box companies convert better? Nope! it means the buyer never bought because the couldn't find the items they wanted to buy.

    Look at Buy.com - the STR is like 2% - 2% - what is the STR for a random 800,000 listings? I don't know I'm asking, but I'll bet it is a hell of a lot higher than 2%. Why don't you do some research and let us know. It's a good idea to research before you start making suggestions to people on where to put their money. Seriously that is just gross negligence to be so lazy and to tell people they can believe because you believe that eBay's downward trend is over- shameful really
    Reply
  •  
    Sep 07 08:57 AM
    I am not sure why Amazon's long term is better than Ebay: Amazon's business is a open book and every one can copy it, especially if you can get the critical mass like Ebay does. Ebay's auction is there to stay; now it enters the game of fixed price. So one way of looking at this is that Ebay expand to Amazon's turf and grab some shares, while keeps its own turf of auction intact; there seems to be no serious competitors in the auction field. I have heard that Ebay lost shares but could not figure out to whom. For fixed priced game, Ebay obviously is trying to catch on, a field that it is not the number one play to start with.
    Reply
  •  
    Sep 07 11:23 AM
    Shelley, for the first few months of this year, the STR for BINs for books (one of buy.com's main categories) was approx 30%, not 2.5%; this shows what buyers [i] really[/i] want. This is the type of statistic that shows how bad this sort of deal will be for Ebay's buyers, sellers and investors. I can see nothing in Ebay's thinking that will reverse this trend.
    Reply
  •  
    Sep 07 12:25 PM
    Is this a joke? Ebay? They are doomed and I'll tell you why. JD is trying to make Ebay into a cheesy Amazon clone - the cheapest way possible. There will be NO customer service except whatever the sellers may offer. There will be NO guarantees, again except whatever sellers offer. Really no different than now only when JD gets finished destroying the place all that will be there are big box retailers with the same junk you can buy in your neighborhood mall!!! The one thing that made Ebay what it is - the small sellers of unique and rare items will all be gone...priced out of existence by a bloated greedy company. You want people to invest in this madness? Deutche Bank just downgraded Ebay to 19.00 a share and I fell it will fall even more than that. Ebay is doomed unless JD and his crowd are ousted and a team of experienced professionals are brought in!

    Why is Amazon so popular? 1) They actually sell products themselves; 2) They have an unconditional moneyback guarrantee AND they actually have the phones manned with human being customer service reps. No...JD and his ridiculous plan will NOT take one buyer from Amazon - in fact, Amazon will have more buyers than it needs!

    10 year disgusted Ebay seller!
    Reply
  •  
    Sep 07 10:02 PM
    You are talking about one category, and it is a category that eBay trails in. What is the STR for buy as a whole?

    This will put a lot of real paying eBay sellers out of business and then eBay will have nothing to fund the welfare program they instituted for these big box companies. That is when eBay will crash. Losing eBay sellers means losing the buying aspect of the seller him/herself and the buyers that are loyalty to the people they purchased product from. The decline in the variety of product (whether removed from the site or buried behind the free loaders) will cause a decrease in traffic and eBay's revenue from ads will decrease relatively and that goes the same for eBay's PayPal ruling e-commerce scheme also.

    The most disturbingly sad reality is most sellers have no idea the massive amount of changes that have taken place and their significance and will be sideswiped and driven out of business as quickly as eBay's ban on electronic downloads hit. eBay really is being ran by a depraved sadistic management team- it is appalling.
    Reply
  •  
    Sep 07 10:09 PM
    The risk of pair trade just based on technical analysis is that you can get it doubly wrong.. specially when you are betting against the company gaining market share, in this case Amazon.
    Reply
  •  
    Sep 07 10:42 PM
    If it weren't for the rare and unusual cool things on ebay...I wouldn't even go there. To me amazon is just a reference tool..I don't really care for the user interface operation they have... I hardly ever buy from amazon since there isn't much that interests me. It does seem that buy it now stuff is lame since, like I'll say again: being part of a REAL AUCTION is part of the FUN of it..it seems like one's somewhat in control of it. Both sites need to get a handle on shipping costs for buyers..thats a MAJOR TURNOFF and page shutter... It shouldn't take a beginner 6 months to figure out how to sell in ebay..I still haven't sold a thing...
    Reply
  •  
    Sep 08 09:31 AM
    Patricia - You may be the angriest eBay watcher on the blogosphere. Remove that anger and what you'll see is that the company's market for auction is slowly flattening. You can't call a $4.5+ billion business unit dead. But the reality is management has to find and accelerate new revenue streams other than auction. What John is doing is just that. Look for major overhaul in how the organisation is aligned as with the flattening in auction will go with a restructuring of people in that business unit. Read my blog at ebaywatchblog.com. More to come on why Skype will outlive eBay.com and PayPal.
    Dan
    Reply
  •  
    Sep 08 04:28 PM
    "A sluggish core auction business is the main reason why this is forth year with negative return on Ebay's share price."

    "... the company's market for auction is slowly flattening."


    Yes, the auction format has seen a decrease in activity these past four years. It is just a coincidence that ebay, in mid-2004, changed the platform to better-accomodate the searching for Commodity items.

    At that time, they also drastically changed the category system, after having been laborously developed over the previous years with user input. The site's Basic Search Algorithm was 'developed' into a Finding Results conglomeration that returned unrelated results.

    The layout of the site (aka GUI - graphic user interface) underwent complete surgical transformation. One day it looked one way, the next day it didn't resemble the site that its many users had grown accustomed to seeing, for years.

    One heck of a coincidence, heh? All those radical changes done at the same time as the auction market downtrend... no connection? Hey, you can 'watch' and 'blog' about it all you want, but if you can't see that, your opinion is meangingless.
    Reply
  •  
    Sep 08 08:10 PM
    End 2008 ebay have buy back lot of stock for a price hehe
    Reply
  •  
    Sep 09 07:48 PM
    Dan - Tony P is right. Ebay has been manipulating listings thru search and messing with the auction format since 2004 when they did away with Going, Going, Gone and started to dumb down the auction scene and clutter of site from top to bottom with ads....at one time even experimenting with floating small ads in a seller's listing! That was stopped quickly! I, and other like me have been protesting THAT long! I have every right to be angry with Ebay. Since January of this year have destroyed something that was bread and butter to me and a LOT of other sellers. Far as I can see, they've LOST all that revenue to the likes of buy.com with its 3 percent sell thru rate and the rumored free insertion fees! Okay - so you say the auction format is winding down...maybe it is but Ebay could have easily tweaked it up by making Buy it Now a free option instead of charging for it! That would have made any auction in which it was used a fixed price auction! fixed price listings have been running for awhile now - and yet auctions are 57 percent of sales! There is plenty ebay could have done - but they don't want fixed price or auctions - they want big box sellers and they want the little sellers gone! They have a greedy eye on Amazon's profits and that's where they're heading directly from point A to point B with no stops in between for proper customer service, a good working search, planning or proper management of their sellers!

    I'm among literally thousands of small sellers who are smugly standing by watching for ebay's collapse. It may take awhile because of their size but we're convinced its coming. Yes, I'm angry and rightly so...but now I'm watching them from my stores on Bonanzle, Blujay, Etsy, Overstock and iOffer :-)
    Reply
  •  
    Sep 12 02:48 AM
    I was a PLATINUM powerseller on eBay, recently got a call today telling me they were suspending my account... We paid eBay over $30,000 a year in revenue.

    Reason for account suspension is due to 1) feedback rules parties can no longer remove neg. feedback, so sometimes new buyers leave negative feedback without giving seller chance to rectify situation not fully understanding the ramifications of this and 2) If your buyer satisfaction falls below their new "standard" you will also be subject to suspension. I have DSR all 4.6 out of 5 OR HIGHER on every category, (that equals 92% rating or better) and the 2 neg. feedback within 30 days and according to eBay this was just cause for suspension even though one of the Neg feedback the buyer left follow up comment saying he had made an error and all was well...

    I had 99.4% feedback at over 1500 feedbacks. We are are not even going to fight this, going to use other avenues now.

    There are MANY high volume powersellers who have left eBay in the last 3 months due to arrogant unfair policy changes.

    I prey that eBay fails miserably so they can fire current president and revamp their entire business, used to be a great venue. Monopolies create extreme arrogance in my opinion. How I wish Google would just take them out.

    Dear eBay go !@#$#!@ yourself. Sincerely, former PLATINUM POWERSELLER.
    Reply
  •  
    Sep 14 11:02 AM
    Is there feedback for sales on AMAZON? Like ebay ...I am a small seller on ebay ....ebay makes money from sellers , yes...not buyers , yes...Why destroy sellers business and make them leave ? For more growth and profit , yes...Sellers do all the work , Listing descriptions , Scans or photos, posting and packaging , answering questions from potential buyers,communicating with buyers,dealing with constant problems with the ebay site etc etc....With people like this why would you wish to make them leave ?.They made you , yes...Growth we need to grow bigger and stronger more profits , we will control everything , yes , please say yes .Sorry ebay market says nooooo........Bigger picture.....Growth is a game of Pyramid selling even if it lasts 100 years , same result , first in wins , last in loses...Growth WILL NOT LAST FOREVER it has to have a high or extreme peak , CAP.....Number of people in the world or money a company can make etc......Would be nice if everyone was happy with enough money to be comfortable and the luckyones helped the less fortunate..... Did this make any sense to anyone? no , yes
    Reply
  •  
    Sep 15 01:33 AM
    I see from comments below (and my own experience) that the end result of the new feedback system is that any buyer can easily wreck a seller's business - buy a few items, give negative feedbacks - these can't be fixed, ebay reprimands the seller, and zaps the seller's ranking in subsequent search results, business drops, things get worse - so every transaction is a "risk the business" one. Nice work ebay - BTW if a buyer is also a seller and leaves you a negative - I'd suggest buying a few items from him/her and leaving some gratuitious negatives - ebay will take care of the rest for you :+)
    Reply
  •  
    Oct 19 03:30 AM
    Ebays problems are just starting... I would not buy an ebay share or an ebay item. Ebay has forgot that customers make a business, they should be treated as a customer and not a number. And as for Paypal, what makes you think you can hold MY MONEY for 21 days? Very unethical way to make money if you ask me... People dont pay top dollar for that crap... NO CUSTOMER SERVICE... HOW CAN SOMEONE RECOMMEND THIS STOCK? SHAME ON YOU...

    EBAYS STOCK PRICE HAS BEEN DOWNGRADED AGAIN TO $13

    it is now the 19th Oct 08... Ebay shares are $15

    They were $22 when the main article was wrote

    WHAT A LAME RECOMMENDATION...
    Reply
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