Amazon and Ebay. Both Companies Were Among

¶ … Amazon and eBay. Both companies were among the first movers into the Internet. Amazon opened the doors to its online store in July, 1995 and completed its initial public offering in 1997. eBay was also founded in 1995 and went public in 1998. These two companies have always been among the leaders in e-commerce. Amazon began with a focus on books and music. It soon expanded its product lines significantly to become a general merchandiser. Amazon is also an intermediary for third party vendors. eBay has always played the intermediary role. Unlike Amazon, where goods are offered for sale, eBay has used an auction platform in order to move its goods, taking a fee on the sale. Both companies remain as industry leaders. Amazon has withstood challenges from leading bricks and mortar retailers to remain as the number one vendor on the Internet (Internet Retailer, 2012). eBay has struggled to maintain its market share, with revenue growing at a much slower pace and shareholders demanding change. eBay has responded by offering services to major retailers in need to liquidating merchandise and fixed price goods; these services take it into direct competition with Amazon (Kopytoff, 2011).

Major Customers and Suppliers

As a general merchandiser and the largest e-commerce business in the world, Amazon has a broad customer base. Its biggest market is in the United States, but there is no one dominant demographic. Amazon sells to a customer base of tens of millions around the world, including a core base of subscribers to its Prime program. There are around 3 to 5 million Prime subscribers, and they are believed to be the heaviest users of Amazon, in general. The company does not release a specific number of these members, much less sensitive demographic information. Amazon generally has moderate bargaining power over buyers. While many buyers will specifically use Amazon to comparison shop, many users simply use Amazon for convenience without shopping around. Prime users are believed to have a high level of brand loyalty and are less likely to shop around (Lee & Kucera, 2012).

Amazon's suppliers are a wide range of industries, including third party vendors. Amazon generally has good bargaining power over suppliers. Companies recognize the value in using Amazon as a platform because of its popularity and user base. Selling through Amazon is a means to access any customer anywhere, and do it through the biggest online channel. Suppliers give up some margin to deal with Amazon compared with vending through their own site, but they also gain access to tens of millions of additional consumers. Suppliers still retain more margin working with Amazon than they would working with the #2 general merchandise e-commerce outlet, Walmart.com.

eBay's auction model means that its suppliers range from stores to hobbyists who are seeking the best possible price for their goods. With small businesses, eBay competes directly with Amazon for the right to work with them to move their merchandise. With both markets, eBay competes with other auction sites, with Craigslist, and there are other alternatives as well. eBay does not have the industry leadership that Amazon has, so it does not have the same bargaining power. Craigslist in particular has the ability to offer a means of selling things without spending too much money.

eBay's has very little bargaining power over customers. The company's customers big on auctions so they set the price. eBay, as intermediary, takes whatever fee comes out of that price. Thus while there might be margin certainty there is no revenue certainty because eBay has little control over what is bought and sold on its site, and for how much.

Amazon founder Jeff Bezos still runs the company as President, CEO and Chairman of the Board. He has built a team around him that consists of longtime Amazon employees how have worked their way up through the ranks. Some newer VPs have been hired from the outside, from companies like GE and Deloitte & Touche. This leadership team has proven capable of guiding Amazon, and in particular the leadership of Bezos has been critical to the company's success over the years.

The eBay leadership team has had less stability. The current CEO, John Donahoe, joined the company in 2005 after working at Bain & Company, and he became CEO in 2008. eBay has a good team of senior executives, but the one drawback is that most of them only joined the company from the mid-2000s. Few if any remember when eBay was the dominant platform in the industry and on a par with Amazon for prestige.

2. Amazon's IPO was offered at $18 per share, and quickly traded above that (Galante & Kawamoto, 1998). The stock's price has increased since then, if only just a little. The following graph highlights the increase in Amazon's stock price.

eBay's IPO was also set at $18 per share in 1998. The company's stock price has not increased to the same degree as that of Amazon, but it has performed well. The graph of eBay's stock price trend line is as follows:

These trend lines illustrate that Amazon has seen its stock price increase much more quickly than eBay. Both companies have seen their stock prices increase significantly in the past year as well. The sharp upward trend for Amazon, however, is superior to tha to eBay and reflects superior underlying strength in the business.

3. Amazon has been the source of a lot of news that has helped to move the company's stock in the past couple of years. In one move, the company announced it was going to enter the print publishing business, expanding on its large digital publishing empire, only to have rival Barnes & Noble decline to carry any of Amazon's print books. Barnes & Nobles is major competitor in the book industry and the leading bricks and mortar player. Amazon may have bigger fish to fry (like Walmart) but Barnes & Noble does not. It has the Nook e-reader, which directly competes against Amazon's Kindle, and both devices have enjoyed some success. With this move, Barnes & Noble effectively upped the personal stakes of the competition. Amazon loses what could be a major sales channel, but the bigger story is that its print publishing business is likely to be a success and remains a threat to Barnes & Noble (Bosman, 2012).

Amazon has also come under fire in the past year for avoiding, by and large, payment of taxes in Europe. The United Kingdom in particular is targeting U.S. companies for failing to pay their taxes in the country. Amazon's EU operations are headquartered in Luxembourg, and it registers its UK operation as a service company for the Luxembourg company. The Luxembourg company recorded $12 billion in revenue and the UK company just $330 million. The UK in particular is seeking to find ways to have these companies pay more in taxes. They do not necessarily have any legal recourse but the issue has created controversy, and Amazon has also be subject to action from France, Germany and Italy as well. However, none of these countries has a legal case -- they created the rules that Amazon is exploiting when they build their customs union. However, they idea that Amazon could find itself paying much more in taxes in Europe could suppress the stock price.

eBay has long grown via acquisition. The company acquired Svpply in 2012, a company that specializes in a superior online shopping experience. eBay has made a number of acquisitions over the years in order to enhance its service offering. One of the ways that it has fallen behind some rivals is that its interface is not optimized. Svpply is a company whose design and technology could change that, and could enhance the eBay experience in a way that drives greater demand (Rao, 2012).

Another announcement that eBay has made has been the purchase for $135 million the company Where. This company has a number of location-based services that eBay hopes will help to enhance the PayPal business (Huang, 2011). The company's acquisitions are all designed to enhance the current service offering, and in doing so eBay hopes to not only drive membership growth but traffic growth and sales growth as well. eBay has been losing share over the years as other payment options have delivered technological superiority or have emerged to serve niches in the business (Asay, 2012).

These news items could have some influence over the decision to investment in either company. Naturally all four of these items have long ago been priced into the stock price. However, the most important thing to consider is the trend of the company's business in general. Both companies have seen significant increases in their stock prices over the past year, and therefore neither is trading at a specific discount. Thus, the purchase decision needs to be made on the basis of where the business is headed. eBay is making a lot of purchases to try to enhance its business. Amazon's tax problem is probably the biggest obstacle, but ultimately there is little Europe can do without closing the legal loophole that these companies are walking through. They might do that, however, so that more European governments can gain taxes. That could legitimately hurt Amazon and might be something to take into consideration when making an investment in that company.

4. Financially, Amazon is in an excellent position. There are a few different things one looks for in an investment. On the income statement, profitability and growth are critical. Amazon has experienced incredible sales growth in recent years, increasing from $14.8 billion FY 2007 to $48 billion in FY2011. Profits have not grown nearly as quickly, however, moving from $476 million to $631 million. This is because the company has been forced to grow rapidly and its cost structure has increased. The gross margin has remained roughly the same over the past five years, despite the introduction of the Kindle that is often rumored to be sold at a loss for the company.

Amazon has a healthy balance sheet. The company has a relatively low level of long-term debt ($1.4 billion) and has seen a strong increase in the book value of its equity. Amazon's equity is worth $7.57 billion today, compared with $1.19 billion in FY2007. This growth mirrors the growth in the company's revenues, so revenue growth is finding its way back to the shareholders. The liquidity ratios are also important, and Amazon is a liquid company. Its current ratio is at 1.17. This compares with 1.39 in FY2007, indicating that while the liquidity is currently healthy it has been better in the past. Overall, however, there is little for the investor to worry about with Amazon's financial condition.

eBay has seen slower growth in revenues but has experience strong growth in profits over the past few years. Revenues grew from $7.6 billion to $11.6 billion in FY2011. In that same span, profits increased from $348 million to $3.229 billion. One of the reasons for this success is that eBay has held the rate of increase in its sales, general and administration expense to a lower level than the rate of revenue. While revenues have increased 51% in the past five years, this expense has increased 40%. The dollar value difference that this makes accounts for almost all of the increase in net income that the company has experienced.

eBay's balance sheet is strong. The equity has increased steadily over the past five years from $11.7 billion to $17.9 billion, an increase of 53% in that time. The company's has taken on long-term debt in the past couple of years, in the amount of $1.5 billion. This is far less than what eBay has in cash, so the move may simply have been to lower the company's cost of capital while interest rates are at rock bottom levels. The debt does not appear to adversely affect the solvency of the company. eBay's liquidity is also sound. The company's current ratio is 1.88, and this was 2.3 five years ago. While this does represent a decline, the reality is that eBay has a lot of cash, and is a very liquid company. Overall, for all the negative press that eBay receives it is still a solid business with healthy cash flow, improving profitability and great liquidity. There is little fault to find with eBay other than the fact that it has not grown as quickly as some outsiders might have preferred.

This data is reliable for making an investment decision. This financial data has been produced according to Generally Accepted Accounting Principles. It has been audited by an external auditor as well, to verify that it accurately reflects the financial condition of each of these companies. One cannot make investment decisions on the basis of financial data only, but that data is a good starting point because it helps to better understand the company's finances.

Recommendation

If one company had to be chosen for investment, it would be Amazon. Both companies are trading at a high valuation right now, so this recommendation relies strictly on the underlying fundamentals of the business. eBay has a good market position, while Amazon has a great market position. eBay and PayPal have struggled to compete and maintain relevance even against smaller rivals; Amazon is beating Walmart at selling things. The business reality is that while eBay is a good business, it is set to experience mainly slow growth. eBay has not demonstrated that it can innovate and remain on top of its industry. It is doing well, but that success is already priced into the stock.