Better Buy Now: Amazon or eBay?

By Markets Fool.com

Amazon.com and eBay are the two leading players in e-commerce, one of the most promising industries around in terms of long-term potential for growth. The two companies are also competing against each other in this attractive business. So which one is a better choice for investors right now: Amazon or eBay?

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Amazon is all about growth and disruption
Amazon one of the strongest growth businesses in the world. The company has a relentless competitive drive, and management is deeply focused on long=term growth, even if it comes at the expense of profit margins. The company sells its products at competitively low prices to gain market share in a wide range of product categories, and Amazon is also investing huge sums of money in areas such as building its distribution network and digital content.

Depending on which area of the income statement you focus on, this strategy can be described as a massive success or a complete failure: Sales are growing at an amazing speed for a company of such a gargantuan scale, but profit margins are low and volatile.

IMAGE SOURCE: The MOTLEY FOOL.

Amazon produced $107 billion in total sales in 2015, a big 20% increase over the prior year. Even better, excluding the $5.2 billion in negative impact from exchange rate fluctuations, total revenue in constant currencies jumped by a staggering 26% year over year. On the other hand, operating profit was only 2% of sales during the year, and Amazon reported just $596 million in net income for 2015, for a minuscule net profit margin of only 0.6%.

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Amazons growth rates are nothing short of spectacular, but profit margins leave much to be desired, and thats not going to change anytime soon. Management expects operating income during the first quarter of 2016 to be between $100 million and $700 million, quite a wide range, which reflects that profits are hard to predict when it comes to Amazon.

eBay is attractively valued
eBay produced a much more modest $8.6 billion in total sales in 2015, and the company comes way behind Amazon in terms of growth. Total revenue declined 2% in U.S. dollars versus 2014 levels, while sales in constant currencies grew 5% year over year.

However, what the company lacks in growth, it has in profitability. While Amazon is mostly an online retailer, eBay operates as an e-commerce platform, meaning that the company matches buyers and sellers of all kinds of products, making a commission on every transaction. This business model has remarkably low capital requirements, and eBay doesnt need to worry about variables such as inventory risk or distribution costs.

This situation allows eBay to sock away huge profit margins, in the area of 26% of revenue at the operating level. Both Amazon and eBay produced operating profits of nearly $2.2 billion in 2015, but eBay generated those profits with only 8% of Amazons revenue base.

IMAGE SOURCE: EBAY.

Valuation metrics for Amazon are hard to gauge. Since the company is spending most of its money on growth investments, current earnings dont really tell the whole story, and the stock looks remarkably expensive when looking at the main valuation ratios.

eBay is a very different story. The company trades at a price-to-earnings ratio of around 15, a material discount versus the neighborhood of 18 for the average company in the S&P 500. Considering that eBay is a major player in e-commerce, and that the company has a remarkably profitable business model, current valuation levels could be offering an attractive entry price for investors.

Amazon or eBay?
Amazon and eBay may operate in the same industry, but the two companies could hardly be more different in terms of what they offer to investors. Amazon is an amazing growth powerhouse with indestructible competitive strengths, but profitability is scarce and unstable. eBay is no match for Amazon in terms of growth or size, but the company makes consistent profits, and the stock is attractively valued at current prices.

At the end of the day, it all depends on your own investment strategy and your vision of the future for the two companies. These categorizations are usually too simplistic, but growth investors would most probably pick Amazon, while those who call themselves value investors would be naturally more inclined toward eBay.

Picking both companies would not only provide diversification in terms of different investment styles, but it could also be a smart strategy to reduce competitive risk by investing in the two leading players in the highly compelling industry of e-commerce.

The article Better Buy Now: Amazon or eBay? originally appeared on Fool.com.

Andrs Cardenal owns shares of Amazon.com. The Motley Fool owns shares of and recommends Amazon.com and eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.