Amazon.com, Inc. (NASDAQ:AMZN) is an exceptional business, playing a large role in the demise of powerhouse retailers Circuit City and Borders. But there’s a price for everything — priced for perfection, Amazon’s stock is inherently risky. If the company’s iconic CEO Jeff Bezos makes one major move that turns out less than outstanding, the stock could get hit hard. Fortunately, there’s an alternative e-commerce investment that presents similar growth opportunities, better business economics, and — most importantly — a better price: eBay Inc (NASDAQ:EBAY) stock.
Price matters
Kudos to any business that can beat Wal-Mart Stores, Inc. (NYSE:WMT) on price; there’s nothing worse than facing an opponent who has mastered your primary strategy better than you have. This is exactly what Amazon has managed to do, beating Wal-Mart where it hurts the most — on price tags.
In fact, Amazon.com, Inc. (NASDAQ:AMZN)’s primary advantage is its low-cost operations. Since e-commerce is far more efficient than brick-and-mortar businesses, Amazon is able to not only undercut Wal-Mart on price but also generate excess economic returns while it’s at it.
Despite continued success, Amazon has significantly underperformed the Dow Jones year to date, with the Dow Jones up about 11.4% and Amazon trailing far behind at 6.7%. Amazon certainly hasn’t slowed down — fourth-quarter year-over-year sales and operating income were up 22% and 56%, respectively — so why is Amazon underperforming the Dow? It’s simple: investors have priced the stock for perfection. Taking the company’s highest free cash flow year of the previous five, Amazon.com, Inc. (NASDAQ:AMZN) trades at about 95 times free cash flow.
eBay’s partnership mind-set could pay huge dividends
When comparing Amazon stock to eBay Inc (NASDAQ:EBAY) stock as potential investments, the first notable difference between the two is their valuations. Despite eBay’s similar growth prospects, the company trades at a reasonable 28 times free cash flow. Also, the company is growing at a similar pace to Amazon, with revenue up 18% and operating income up 28.5%, year over year, in the fourth quarter.
While its marketplaces business segment saw gross merchandise volume increase 19%, the real opportunity lies in PayPal and the company’s partnerships.
Another unique opportunity for eBay Inc (NASDAQ:EBAY) lies in its partnerships. Unlike Amazon.com, Inc. (NASDAQ:AMZN), eBay takes on a strategy of aggressively pursuing merchant partnerships as opposed to competing. The strategy opens doors for faster expansion in the many countries that often limit foreign e-commerce. eBay’s recent investment in India’s Snapdeal.com, for instance, gives the company access to India’s fast-growing e-commerce segment. Market potential is enormous. Snapdeal’s CEO, Kunal Bahl, says smartphone purchases on the company’s platform (currently 15% of sales) are on pace to double in 18 months, according to Businessweek.
