Amazon, eBay Wage Costly Battle for Shoppers

Features Reuters

When Amazon.com Inc and eBay Inc report quarterly results next week, investors will try to determine how well the e-commerce rivals' expensive fight for shoppers is paying off.

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They will want to see if revenue is growing fast enough to justify the costs.

Amazon has been moving further from its traditional business selling physical goods online to take on tech rivals like Apple Inc and Google Inc in areas such as selling digital entertainment and storing data.

EBay is best known for its online auction website and PayPal, a payment system, but it has been making deals to compete more directly with Amazon, such as its $2 billion purchase in May of e-commerce services firm GSI Commerce. That deal is aimed at getting more retailers to sell to their customers using eBay.

Amazon's growth -- its sales nearly doubled between 2008 and 2010 -- has come at a cost: shrinking operating margin. Amazon has made no bones about it, warning investors to expect pressure on its profitability for some time yet.

The question for investors will be how much pressure.

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"They (Amazon) are investing for the future and it's just a matter of how long this investment process will take," said Michael Koskuba, a senior portfolio manager at Victory Capital Management, which has owned Amazon stock since March 2009.

Amazon shares plunged 9 percent on January 27 when it reported a lower operating margin over the holiday quarter.

Amazon has been challenging rivals from Apple to Barnes & Noble Inc and many others with low prices on e-books, cheap shipping and offering customers the ability to store music on its servers in a "music locker."

A stellar sales performance by Amazon would mollify investors worried about the impact on profits, but a so-so performance could send shares down.

"If Amazon has a strong revenue quarter, people will be more willing to overlook margins," said Cowen & Co analyst Jim Friedland. "If they come in close to expectations (on sales) but margins are weaker, that would absolutely provoke a sell-off."

Ultimately, revenue will be the barometer of how well Amazon is doing at fending off a resurgent eBay.

"Revenue reflects how much market share they still have to gain," said BGC Partners analyst Colin Gillis.

On average, Wall Street analysts expect Amazon to report a first-quarter profit of 61 cents per share on $9.52 billion in sales, down from 66 cents a year earlier, according to Thomson Reuters I/B/E/S.

They expect eBay's profit to come to 46 cents per share on revenue of $2.48 billion, compared to 42 cents per share a year earlier.

For a graphic comparing Amazon and eBay's revenue growth, see: r.reuters.com/nuj29r

SCRUTINY OF EBAY'S AUCTION SITE

Investors will most likely be swayed by how much merchandise is sold on eBay's auction site as well as the number of new PayPal accounts.

But one analyst said eBay would probably only get punished for weakness, rather than rewarded for strength.

"If eBay falls short, it's more about stronger than expected competition from Amazon, but if it rises more than expected, it's more about the (better) overall economy," Cowen's Friedland said.

Friedland is expecting gross merchandise volume, a closely watched measure of the total value of goods sold on eBay's marketplaces, to be up 6 percent increase, excluding vehicles.

PayPal has led the company's revenue growth for years, while its marketplaces unit has matured. PayPal accounted for just over one third of sales last year but its revenues rose 23 percent, while the marketplaces business sales were up only 8 percent.

Amazon shares trade at a 2011-earnings-to-price multiple of 55, far above most store chains as well as eBay, Apple and Google, suggesting the stock has downside.

EBay shares trade a future earnings to price ration of 16.4 and analysts say that means it may have more upside than Amazon's if its results impress investors. They have slipped 10 percent since hitting a yearly high in February.

"EBay is coming back. If you want e-commerce exposure, buy eBay." BCG's Gillis said.

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