A comparative financial analysis of Amazon and eBay

AMAZON VS. EBAY

eBay vs. Amazon

Both Amazon and eBay have carved out significant niches in the online retailing world but they have done it strikingly different ways. However, despite these differences they are very similar in many ways including the legal, political and other struggles they face. This report will cover all of those in fairly deep detail. Topics to be covered will include a profile for each, stock performance in the recent past as well as with the initial public offering, three news events that the companies are facing, an overall financial analysis of each company, the accuracy/reliability of the data and lastly a recommendation of which company is in a more solid position financially and is best built for future performance (Yahoo Finance, 2012).

Company Profiles

Amazon and eBay are certainly both in the online-only retail sector, but they approach the sector through very different business models. Amazon sells many to most of the very same goods that one can buy from local grocers such as Kroger Inc. And Wal-Mart. Amazon does a lot of its own order fulfillment but farms out a lot of that to vendors and even some personal sellers who offer their goods through Amazon but at the price of Amazon getting a small cut since they are providing the website (Yahoo Finance, 2012).

eBay is different in that while they allow sales and such from established external retailers, they themselves to do not sell anything directly to consumers. Eveyrone that lists items on eBay is generally someone that has nothing to do with eBay directly and is simply using the eBay site as a sort of online classifieds. In other words, Amazon sells their wares personally through their own means, via "stores" of companies like Microsoft and from personal sellers. eBay only does the latter two of those three.

As for their histories, both companies were created in the mid-1990's. Amazon is based in Seattle whereas eBay is based in San Jose, CA (Yahoo Finance, 2012). eBay has nearly 28 thousand employees whereas Amazon is pushing 60,000. Both firms share similar, but not the same, competitors. Amazon's competitors are listed on Yahoo Finance as Barnes and Nobles (since Amazon's bread and butter started out as books), Apple (due mostly to the Kindle Fire vs. iPad competition) and other mail order and catalog ventures. One could make a case that firms like Wal-Mart, Target and Best Buy are also competitors (Yahoo Finance, 2012).

As for eBay, their direct competitors are a bit different since their service methodology is also different. Yahoo Finance lists eBay's competitors are Amazon, Google, Overstock.com and a few other mail order/catalog retailer players. eBay's overall revenues are far lower than Amazon ($57.26 billion) and Google ($47.54 billion) while eBay is at neatly $13.5 billion. Also as noted on the competitor charge, both Amazon and Google are growing much faster than eBay, so the gap is growing. As of the last measurement, eBay was growing at 15% while Amazon (27%) and Google (45%) were/are growing much faster. While the companies all share very common threads in what they sell and do, all three of them (Amazon and eBay directly compared included) are all very different companies.

News Issues for Amazon & eBay

One major issue that affects Amazon (but also pertains to eBay as well) is the issue of sales tax collection. In general terms, if a company in one state sells a product to someone in the same state, the retailer is generally compelled to collect sales tax. For example, if Amazon (which is in Washington state) sells to a buyer that is also in Washington state, they are legally compelled to collect sales tax. However, if they sell to someone in Colorado, that is no longer the case. The burden to report the sales tax has fallen on the buyer much more than the seller in a multi-state scenario. Several states have shifted the relevant laws greatly since this has become an issue over the last few years, but the buyer typically still bears the burden even if many politicians say that Amazon should be doing so even though it has no legal compulsion to do so (Yang, 2009)("Connecticut joins calls," 2011).

As noted above, several different states are making calls for Amazon to collect and pay the tax. The states that have done this include California, Texas and Connecticut. For example, Connecticut has implemented a law requiring online retailers to collect tax but Amazon states that they are not subject to that law since they do not have a physical presence in that state and, therefore, the state of Connecticut has no authority to make them pay anything. This all being said, Amazon has inoculated itself from a challenge to that statement given that they have intentionally and completely cut ties with any official vendors and distributors that operate in that state. Amazon has held the stance that the buyers bear the burden in such a situation and that the state should deal with them. The only single jurisdiction that would have unquestioned authority to handle this subject would be the federal government but there is no movement on implementing such a law at this time (Yang, 2009)("Connecticut joins calls," 2011).

The dynamic that leads to the above causes the same headaches with eBay, but to a lesser extent from an actual standpoint and it has more to do with purchasing certain goods online. One such good would be vehicles such as tractors. Buying something as significant (and pricey) as a tractor or a precious stone has a lot of implications due to the fact that the buyer and seller are greatly separated from a geographical standpoint and the purchase is often executed (or at least partially secured by a deposit) before the buyer even sees or feels the product in person. As such, the normal protocols of how to execute the transaction at a high level are entirely different and eBay has had to adjust its practices and conflict resolution framework to protect both the buyer and the seller from harm (Diekmann, Roe & Batte, 2008). eBay has also had to deal with patent laws relative to the technologies and methods they use to sell their wares. One such spat was between eBay and MercExchange LLC. A pertinent question that came from that (and similar) cases is whether permanent injunctions can (or should) be used to stop patent infringement (Mulder, 2007).

To summarize all of the issues above, it is clear that Amazon and eBay are both causing an extreme amount of "new ground" to be plowed in the subjects of contract law, retailing rules/regulations and best practices and where the burden should fall for tax payments. In short, the author of this paper would offer that the federal government is the only entity that can resolve the tax spats because they're the only government body that has the proper level of jurisdiction and patent laws in general should really be looked at. Protecting the inventions and innovation of a person (or company) is fine but any fallout from a patent spat (like the current one between Apple and Samsung) has to be based on common sense and what/who was truly harmed.

Financial Analysis

In looking at financial statements, both Amazon and eBay have both been doing quite well over the last three full years. However, while revenues for both are obviously and massively expanding, Amazon is doing far better. Between 2009 and 2011, Amazon's revenue has nearly doubled, going from $24.5 billion (2009) to $48 billion (2011). Amazon's gross profit has also doubled but so has their selling general and administrative costs, so their net income is actually down a bit (Yahoo Finance, 2012).

Over that same period, eBay has grown much more modestly. The have gone from $8.7 billion in 2009 to $11.6 billion in 2011, but their net income has grown much more over the entire period, even if there was actually a fall from 2009 to 2010. Overall, they've risen nearly a billion ($2.3 billion to $3.2 billion).

Accuracy & Reliability

The data with Amazon seems to be much more reliable given the much less volatile nature of their stock price, although the author of this paper would hope that they've explained why their selling/admin costs have risen so sharply. However, this is almost certainly a function of them expanding their sales and admin performance and, if that's true, they've done a great job. eBay's stock price has been much more volatile but heir overall financial metrics have been strong. On the whole, what they've reported has largely squared with the stock price as none of the swings (the 2008/2009 ones aside) have not been all that bad.

Recommendation

Overall, Amazon is clearly the better buy. When a company's success is viewed as a threat to the only big box electronics-only retailer in the country (Best Buy), a firm has to be doing something right. eBay's fundamentals are strong and they are heading in the right direction, but Amazon's stock price is bigger by a factor of 5, their revenue is a lot more and they are clearly investing in the future. eBay seems to be the tortoise and Amazon is the hare. However, we all know how the tortoise/hare story ended, so Amazon needs to be careful to not overextend themselves, run afoul of the law (e.g. The tax thing) and so forth. However, they remain the clear favorite so long as they don't get reckless or complacent.

Conclusion

In conclusion, both companies are doing very well but Amazon is clearly superior to eBay over the long haul. They are clearly more diversified and able to weather a storm. For example, if the online auction industry was subject to sweeping regulations tomorrow, eBay would bear a huge impact whereas the same would not be true if Amazon got subject to the same because they have so many dimensions of their business that do extremely well.