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eBay Inc (EBAY), Amazon.com, Inc. (AMZN): Why Is One of the E-Commerce Leaders Cheap and the Other Is Not?

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eBay Earnings ReporteBay Inc (NASDAQ:EBAY) is one of the internet’s most popular e-commerce destinations, whose business has evolved well beyond the early years as an auction site. In the past decade or so, eBay has become a leader in payment processing, marketing solutions, and even secondhand ticket sales. With shares having pulled back 12% from the highs reached last month, is the market giving us a second chance at a good entry point in eBay Inc (NASDAQ:EBAY), or should we look elsewhere in the world of e-commerce?

eBay’s business today

As mentioned, eBay Inc (NASDAQ:EBAY) has greatly evolved and diversified its business over the years. As a result, revenues have climbed tremendously, up by about 700% over the last decade alone.

In addition to its flagship online marketplace and its 116 million active users, eBay also owns several other e-commerce businesses as a result of a series of acquisitions. Bill Me Later and PayPal are both owned by eBay Inc (NASDAQ:EBAY) and provide payment processing solutions. Gmarket and GSI Commerce provide e-commerce and marketing solutions. Shopping.com is one of the premier destinations for comparison shopping. Finally, StubHub, which eBay acquired for $310 million in 2007, is a leading ticket exchange website that has grown to about 15 million unique visitors monthly.

Future growth potential

EBay has stated that its goal is to become the world’s most efficient and abundant marketplace, and the recent acquisitions have been a big step toward reaching that goal. The company plans to continue to pursue acquisitions that it feels will provide more choices to both buyers and sellers.

In terms of eBay Inc (NASDAQ:EBAY)’s existing business lines, one initiative that I am particularly optimistic about is PayPal’s recently announced partnership with Discover Financial Services (NYSE:DFS). Under the terms of the partnership, Discover Financial Services (NYSE:DFS) will issue physical debit cards linked to users’ PayPal accounts that can be used anywhere. I believe that this deal will be very beneficial to both companies, and to Discover Financial Services (NYSE:DFS) in particular, who should be able to leverage PayPal’s enormous customer base to help in its quest to become one of the premier card issuers in the world. PayPal should see a huge increase in the volume of funds flowing in and out of their accounts, and that will mean more fees for eBay, who already makes about 40% of its money from PayPal.

The Numbers

Despite what I consider to be well above-average growth potential, eBay trades at a very reasonable price, especially after the recent pullback in share price. At 18.6 times 2013’s expected earnings of $2.75 per share, eBay is a bargain considering the growth that is projected. The consensus calls for earnings of $3.23 and $3.80 in 2014 and 2015, respectively, which corresponds to annual earnings growth of 17.5% and 17.7%. Also worth considering is the fact that eBay Inc (NASDAQ:EBAY) has well over $5 billion in net cash (cash minus debt), which makes eBay’s business itself even cheaper when you subtract cash from the share price.

The other big player in e-commerce, Amazon.com

The other major player in e-commerce is Amazon.com, Inc. (NASDAQ:AMZN), which is about twice the size of eBay in terms of market cap. Amazon is by far the leading online retailer, with sales of almost $80 billion expected this year. I have read all kinds of commentary about how Amazon is overvalued and trades at a ridiculous P/E, but that is not why I don’t like Amazon.com, Inc. (NASDAQ:AMZN) as an investment.

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