Is This Rally for Online Retailers Sustainable? – eBay Inc (EBAY), Netflix, Inc. (NFLX)

Shares of major e-commerce companies have started off the year rising, most notably Netflix, Inc. (NASDAQ:NFLX) that spiked by 97%. Shares of eBay Inc (NASDAQ:EBAY) and Amazon.com, Inc. (NASDAQ:AMZN) have also increased but at a lower rate. Is their rally sustainable? One way of answering this question is by examining these companies’ performance compared to the e-commerce industry: If these companies’ revenues grew at a faster pace than that of the entire industry, then demand for their stocks is likely to further rise. So let’s examine the growth in sales in the e-commerce industry and compare it to the growth in sales of the above-mentioned companies.

E-commerce [opens pdf] still accounts for a small but growing percentage of the entire retail sales market. In the third quarter of 2012, e-commerce sales reached $57 billion (adjusted), which accounts for nearly 5.2% of total retail sales. This represents a 17.3% growth from the parallel quarter in 2011.

In comparison, total retail sales rose by only 4.6% during this period. Furthermore, in the first three quarters of 2012, e-commerce sales rose by 15.9% compared to the first three quarters of 2011. In 2011, the growth in sales was similar to 2012 – 15% (compared to 2010). This number of nearly 16% growth in 2012 could serve as a benchmark for the average growth of this industry. Let’s examine how the leading online companies have done in 2012.

eBay

This company has done well in 2012 with a rise in revenues of 20.8% (year -over-year) and a steady operating margin of nearly 20.5% (in 2011 it was 21%). Thus, the company’s growth in revenues was higher than the industry average. So the rise in demand for this high-growth company is reasonable.

Nonetheless, it’s worth noting that this company’s free cash flow is nearly non-existent (by the end of 2012 it was $75 million). The company’s cash flow was sustained by raising debt of nearly $2.5 billion in 2012. If eBay were to face problems raising debt to maintain its net cash flow positive, this could impede its future growth.

Netflix

Even though this company might not be labeled as a hard core retailer it does provide a service (TV shows and movies in streaming) that is slowly replacing products – DVDs.

The growth in revenues of Netflix may have been among the main factors for the spike in the company’s stock price. Even though the company’s growth in revenues in 2012 was 12.6%, which is lower than the industry benchmark, I have already gone over the recent developments in this company’s stock.