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eBay vs Amazon: My Take

Posted on Friday, Dec 14th 2007

So, I asked you to think about whether eBay or Amazon is a better company. I pointed out that Amazon’s stock is performing a lot better than eBay’s this year.

One of you rightly pointed out that Amazon’s margins are a problem. Indeed, as I discussed at length in the series we just completed, Amazon really needs to rethink the margin equation. What’s alarming is that they keep entering low margin businesses.

In contrast, eBay has a very profitable business model, but their problem has been growth. For the first nine months of 2007, the number of listings on eBay was down 3 percent from the same period in 2006. We also analyzed eBay recently, and recommended that they diversify out of ecommerce as their primary business model.

In terms of Traffic, Amazon is up 11% while eBay is down 1% before the holidays. Not good news for eBay. That means, shoppers are going elsewhere. Let’s see how the holidays fare, although, there is inherent advantage that Amazon has wrt holidays and gift giving: eBay doesn’t offer gift wrapping!

I am also a huge fan of Amazon’s personalized recommendations, because it has gotten to know me over a long period of time. It knows that I like Michael Ondaatje’s Cinnamon Peeler, and for that reason alone, I will never leave Amazon. [I will also never leave Netflix, even though I have said that I would never invest in DVD rentals … Netflix knows that I like Love Song for Bobby Long.] In contrast, eBay has a rather marginal understanding of my tastes and preferences.

In my vision of a Web 3.0 world, Personalization will be the key determining element, and I do think that Amazon understands this phenomenon much, much better than eBay.

Finally, and this really should scare eBay, PowerSellers are moving from eBay to Amazon. Why? Most likely because Amazon is offering to take care of their entire logistics and fulfillment needs, which for many of them have become significant as their businesses have grown. eBay will hurt tremendously if they don’t come up with a creative response.

Overall, Amazon is a much more creative company, while eBay, when it tries to be creative, does stupid things like buying Skype. I don’t like Amazon’s business model and profitability equation, but I have greater faith on Jeff Bezos and his team’s ability to make changes than I do on Meg Whitman and her team.

So, what’s the chance that Amazon can make a strong success of their Marketplace initiative and use that to change the profitability equation?

I’d say pretty high!

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Comments

There is a big difference between a good company and a good investment. That Amazon is a better company than eBay I think we all agree with you. That it is a better investment is much less obvious given the massive difference in valuation metrics.

Johanes Friday, December 14, 2007 at 7:24 AM PT

Well, a good investment is a company whose stock price appreciates. I will safely conclude that Amazon’s stock price is far more likely to appreciate than eBay’s.

Sramana Mitra Friday, December 14, 2007 at 1:52 PM PT

Actually, that’s not quite right. The stock price is the present value of all expected future cash flows of a company (regardless of whether they represent good or bad companies) and stock prices appreciate or depreciate to the extent that real cash flows differ from these expectations.

If investors think Amazon is a great company and anticipate great free cash flows then the current stock price will already reflect that view. Meanwhile, if investors feel like eBay has lost the plot, they will forecast mediocre cash flows and the stock price will already reflect that.

Johanes Friday, December 14, 2007 at 3:51 PM PT

Spoken like a pure finance guy, Johanes. You really believe that stock prices work that simply and formulaecally?

Building companies is not only about financial analysis, I am afraid.

And the stock price moves up or down based on news and sound bytes far more than “equations” as you describe above. Not ONLY based on earnings results.

People make bets based on what they can expect from a company in the future.

And I am telling you, that you can expect some way more promising business improvement moves from Amazon than from eBay.

I think you are trying to understand the companies based on financial metrics alone, whereas my understanding of the two companies is based on more visceral knowledge of both companies, their businesses, and the trends of the industry.

That’s why, I will stand by my comment that Amazon is both a better company and a better investment, even though eBay started with a vastly better business model, with which they should have been in a very different league by now.

Sramana Mitra Friday, December 14, 2007 at 5:02 PM PT

We’ll just have to agree to disagree then. See you in a few months to see how your thesis has played out. For the record, as an investment I prefer eBay even though I recognize Amazon is a better run company at the moment.

Johanes Saturday, December 15, 2007 at 7:21 AM PT

Looks like Johanes was right after all. ebay has outperformed amazon by a long way since December 15th.

chris C Friday, March 28, 2008 at 8:54 AM PT

[…] pricing model to encourage greater selection and to align their success with that of their sellers. But eBay still does not know me like Amazon […]

Not Bullish on eBay - Sramana Mitra on Strategy Thursday, April 17, 2008 at 10:58 AM PT

As I see today, eBay’s shares haven’t actually performed visavis Amazon that well 6 months down. But it may be more to do with a short term market whipping, than a long term lack of confidence. Wall Street had always been short sighted. Some of the recent attempts of eBay in improving search, customer experience and buyer protection might have offended a few powersellers, but I’m confident that it will do more good to the business in the long term than what is perceived today. The focus has no doubt been the customer, and this is the start. I’m sure rest of the stuff will follow.
Also, at a susceptable downturn time, both Amazon and eBay have compromised on margins; may be eBay more. But the better company to sustain the downturn; without question my vote would be for eBay.

Arun Wednesday, July 30, 2008 at 12:26 PM PT

Right! Have you looked at the earnings results? Amazon had a blow-out quarter, and eBay continued fumbling …

Sramana Mitra Wednesday, July 30, 2008 at 12:36 PM PT