BUSINESSWEEK ONLINE : MAY 31, 1999 ISSUE
COVER STORY

Amazon vs. eBay: Their Duel Extends to Wall Street
eBay is profitable now and perhaps "safer." But Amazon may have better long-term potential and is ''cheap'' now

If you could buy stock in just one, Amazon.com AMZN or eBay EBAY right now, which would you choose? Even though the two E-commerce giants are increasingly going head-to-head, their core business models remain very different. That could have dramatic implications for which stock is the better performer over the long term.

eBay's future growth hinges on its ability to draw more merchandise (especially higher-priced items) and more shoppers to its auction format. Amazon's long-term promise lies in its ability track user buying patterns and cross-sell individuals a wide range of items suited to their personal tastes. Both companies are in a position now to ramp up their core businesses -- eBay by tapping into local auctions and Amazon by expanding into widening circles of new products. But while eBay is clearly the safer choice at the moment, Amazon may be the better opportunity at current stock prices.

eBay's safety -- a term perhaps wrongly applied to any Internet stock -- stems from the simple fact that it has proven that its business model works by generating profits. For its 1999 first quarter, it reported net income of $6 million and earnings of 5 cents a share on total merchandise sales of $541 million. ''It is very telling when a significant Internet property can be profitable today given the type of enormous growth that is clearly in front of it,'' says Ryan Jacob, portfolio manager of the Internet Fund. eBay is one of his top holdings, while Amazon and America Online have both dropped out of his top 25 lately, he says.

''NO RISK''? Because eBay simply acts as a broker between buyers and sellers, taking a 6% cut of merchandise sales, Lauren Cooks Levitan, an analyst with BancBoston Robertson Stephens says the business model has ''essentially no risk.'' Net revenues are almost pure profit - eBay's gross margin was 85% in the first quarter of 1999.

Plus, eBay is growing incredibly fast. Its net revenue climbed to $34 million in the recent quarter compared to $19.5 million in the fourth quarter, and $6 million a year ago -- a 74% quarterly increase quarter-to-quarter and a 469% gain over first quarter 1998. Levitan wrote of eBay in a May 19 report: ''We believe the market opportunity is monstrous. The business model is much more profitable than almost any other on the Web. And the stock may reach unprecedented levels.''

Amazon.com doesn't stack up quite so well on most of those measures. In the first quarter of 1999 it reported a net loss of $36 million on revenues of $294 million. Because it discounts low-margin products like books and CDs, its gross margin was only 22%. Sales in the first quarter grew only 16% over the fourth quarter (better than many analysts expected since the holiday season was so strong), while year-over-year, sales grew 236% in the quarter.

Some shareholders are moving out of Amazon as a result of its slowing revenue growth, notes Henry Blodget, an analyst with Merrill Lynch. Plus, recent initiatives, including a May 17 announcement that it will sell bestsellers at 50% off and a May 19 filing with the Securities & Exchange Commission to raise $2 billion by selling securities, seem to push back the day when Amazon will report actual earnings per share. Levitan doesn't expect Amazon to report a profit until 2002.

Apparently, some investors are growing tired of waiting. Amazon is currently down more than 41% from its 52-week high of 221 1/4 reached on Apr. 27. eBay, in contrast, is down 20% from its high of $234.

OPPORTUNITY. Amazon's steep price decline has created an opportunity for investors who believe in CEO Jeff Bezos' long-term vision. It's hard to compare the two stock's valuations since their business models are different, but on a multiple of revenues, eBay is much more expensive. Amazon is a bigger company on measures including number of customers, items for sale, and employees. And it has a more recognizable brand name. Still, at $24.6 billion, eBay now has a higher market capitalization than Amazon, which is valued at $22.5 billion.

Therein lies the opportunity. As positive as Levitan is on eBay, which she rates a buy, she currently rates Amazon.com a strong buy. ''We would not be surprised by temporary weakness in the stock,'' she wrote in an Apr. 29 report following Amazon's latest earnings release. ''However, we would expect a sharp snap back as investors look to build positions in this leading brand.'' She expects new acquisitions and investments to drive the stock higher.

Some analysts believe it's short-sighted for investors to fault Amazon for not reporting profits at this fledgling state of the industry. Bezos claims it's a lower-risk strategy to spend money now to gain customers, knock out competition, and build brand rather than trying to make money now and build brand later. Mary Meeker of Morgan Stanley compares this point in Amazon's history to America Online AOL in 1996. At that time, AOL faced increasing operating costs while building its business, and the stock plummeted. But investors who stuck out the weak period have been well-rewarded. ''If one believes in E-commerce, it's a good bet to believe that AMZN will cross this financial/infrastructure-build chasm and emerge as a champ,'' she wrote on Apr. 29.

Amazon may never have the gross margins of eBay. But its promise of offering consumers quick and convenient access to almost any goods they might want to buy on the Web, seems to be the basis for a much bigger business than eBay's current person-to-person auction model. However, a bigger business doesn't necessarily mean higher profits and better stock market returns. Choosing between eBay and Amazon isn't easy. Fortunately, investors don't really have to make that choice -- buying both or neither is always an option.

By Amey Stone in New York

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ONLINE ORIGINAL: The Duel Extends to Wall Street



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