Better Buy: eBay Inc. vs. Amazon

By Jeremy Bowman Markets Fool.com

No two companies have defined the e-commerce space more thaneBay Inc(NASDAQ: EBAY) andAmazon.com(NASDAQ: AMZN), especially as both emerged at the dawn of the Internet. With its auction-based marketplace, eBay was the early leader in online shopping, while Amazon has expanded from offering books to selling essentially every retail category, borrowing eBay's marketplace model along the way. Today, it's the clear leader in e-commerce.

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Still, size is no guarantee of a wise investment, and both companies have been big winners on the stock market since their IPOs. Today, eBay and Amazon are very different companies with much different business models. Thanks to its marketplace eBay is highly profitable, while Amazon has consistently operated near breakeven as it keeps margins low to grow revenue and plows its cash flow into new investments.

Let's take a closer look at each stock to see which one offers the better buy today.

Image Source: eBay.

A modern-day auction house

Over its history, eBay's value has been determined as much by subsidiary businesses as its namesake e-commerce franchise. For a long time, the company owned the leading online payment service,PayPal, and also claims popular complementary sites like ticket broker StubHub and bookseller Half.com.

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While businesses like StubHub spin off profits by taking a commission off sales, much like eBay's core business, the company has struggled to find revenue growth in recent years. In its most recent quarter, revenue increased 8% on a currency-neutral basis, and the company projects an increase of just 6-7% for the full year. By contrast, e-commerce sales in the US have been growing by about 15% consistently for the last few years, meaning eBay has been losing market share.

That's not necessarily a problem, as the rest of e-commerce is notoriously plagued by a lack of profits, and brick-and-mortar chains have complained that margins are thinner online. However, profit growth has been a challenge as well -- management is forecasting an EPS increase of just around 3% this year.

Discussing the company's turnaround efforts, CEO Devin Wenig said, "We don't want to be like Amazon," a surprising comment from a company often thought of as second fiddle in e-commerce. Elaborating, he said that he'd rather the company sell a million unique items from its individual sellers than a million commodity items like Amazon does. While that strategy makes sense, the company has yet to prove it can be a source of sustainable growth.

Image Source: Motley Fool.

The everything store and more

While eBay has mostly relied on its staid marketplace and a series of acquisitions over the years, Amazon has been a consistent innovator in its 21-year history. Founder Jeff Bezos has made good on his initial promise to build the company for the long term, and while it's had its share of misses, the hits have more than made up for them. For instance, its cloud computing division, Amazon Web Services, may now be the source of more value than its e-commerce business. The unit is on track to deliver $3 billion in operating income this year, and sales have grown by 59% so far this year.

As a stand-alone business, it would be valued well above $100 billion.

Amazon showed off its flair for innovation just last week when it unveiled Amazon Go, a convenience store that has no checkout or lines, relying instead on artificial intelligence to determine what a customer has taken and charging them via their smartphone when they leave the store

It's unclear if the technology will ever generate a significant profit, but it's evidence of what makes Amazon such a special company, as competitors simply don't put the same premium on innovation. Even with its dominance in e-commerce, it continues to gain market share: North American retail sales are up 27% thus far this year. With its Prime membership program, it's able to bundle together its disparate businesses to offer consumers a value that no other company can equal. Its valuation remains high -- at 175 P/E -- but the company has showed time and again why it deserves it.

The winner is clear

While Amazon stock has always been volatile and its triple-digit valuation means the stock could easily sell off on a weak earnings report, the long-term potential looks much greater for a company that has consistently delivered blockbuster sales growth and unparalleled innovation.

eBay, on the other hand, shows little sign of emerging from its recent funk, and the company's core marketplace should continue to lose relevance as Amazon and other competitors make fervent strides forward.

Amazon is the better buy here.

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Jeremy Bowman has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com, eBay, and PayPal Holdings. 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.