Investment Analysis of Amazon Versus eBay - Essay Example

Investment analysis of Amazon versus eBay Introduction Macro and micro economic factors have a direct influence on investment returns and hence it is essential to consider such factors before making any form of investment. This is the essence of investment analysis as it has the impact of making the prospective investors be aware of the market and economic trends as well as the earnings ratios. In addition, these investors also get to know of the other factors and other indicators that aid them in deciding which among the available investments are worth their funds. This paper will focus on the investment analysis of Amazon and eBay and which among the two is worth investing in. Overview of Amazon Amazon is an American Multinational electronic company and it is the largest online retailers dealing in a variety of products. The company was started in 1994 by Jeff Bezo and it has its headquarters in Seattle, Washington in the US. The company exists in the internet and online retailing industry. The company underwent a rebranding in 1995 when it got renamed to Amazon.com from Amazon River. It started its operations with the main objective of offering online books and it diversified its operations later on (BELEW, 2011). Among its original products we have books sold alongside CDs, MP3 downloads, DVDs, video games and a variety of software. In addition to the above, the company later on started dealing in furniture, food stuff, electronics, toys as well as jewelry. Generally, the company provides consumer electronics such as the amazon kindle e-book reader. The products it provides therefore include; IMDb, LoveFilm, The Book Depository, Zappos.com, Woot, Junglee.com, Amazon Studios, Amazon Web Services, Audible.com, dpreview.com, Endless.com, A2Z Development, A9.com, Alexa Internet, Amazon.com, and Amazon Kindle. The company targets the world market with its main consumers being, students at all levels of studies, corporates such the universities, as well as researchers. To widen their supply chain, Amazon targets major suppliers such as top publishers, manufacturers of books, together with researchers and universities. They also coordinate with manufacturers who are involved in the production of other items. Under the leadership of the company steered by Jeff, the company stresses on the principles of customer obsession, hiring and developing the best, insistence on very high quality, aspect of thinking big, vocally self-critical, invention and simplification as well as delivery of results. These leadership principles apply to everyone in the company irrespective of whether they are junior employees or managers (BELEW, 2011). Overview of eBay Just like Amazon, eBay is as well an American Multinational company which was started by Pierre Omidyar’s San Jose in the year 1995. The company was started to create and involvement where buyer and seller interact online during online auction and shopping. The main objective here was to make internet a shopping destination or an online market for humanity. The company is also a part of the internet and online retailing industry (BELEW, 2011). The products that are on offer by eBay are mainly divided into three main categories or segments. These segments include payment, market platforms as well as GSI Commerce. Together, the three categories create a platform within the internet as well as tools and services that aid individuals and online merchants worldwide in formulating mobile and online payment systems and trade. The mode also provides a platform through which it provides software developers with a market to expose and sell their products. The main market of this company is people in terms of individuals as well as businesses who buy and sell a variety of goods and services globally. It is also involved in offering classified advertising services, trade in online tickets and online money transfer services i.e. they have a majority shareholding in PayPal money services. Stock Trend Analysis Amazon stock trend analysis Of the past decade amazon has been the best performing stock and this has been due to its good management exhibited by Bezo and the growth prospects. According to the chart below, the overall price trend of the stock has been on the rise since the issuance of its IPO and this makes this chart quite pretty. (Quotes & Info- Yahoo! Finance. (n.d.) As indicated, the prices of amazon stocks have been on the rise each subsequent year making it one of the best prospective investment destinations on the long term basis. At the beginning of the year 2010 the prices were at $133.9 per share. This went to a price of $184.22 as shown by the rapidly increasing trend in the year 2011 with and a slight drop to $179.03 was witnessed at the beginning of the year 2012. This drop did not take long as the prices shot to $ 192.15 by the end of January of 2012. This places the stocks among the best stocks to invest by prospective investors. EBay Stock Trend Analysis As shown by the graph below eBay prices have been on the rising trend with $23.9, 28.47 and 30.33 for January 1, 2010, January 1, 2011 and January 1, 2012 respectively. See trend below. (EBAY Historical Prices | eBay Inc. Stock - Yahoo! Finance. (n.d.) The stocks of this company have shown positive progress in the recent time with a pulling back being realized on the stock currently. This is witnessed as the stock prepares to consolidate before it starts undergoing another period of growth. As shown by the daily trading price charts it is realizable that the company is trading above its rising key averages and this is a signal towards a neutral to bullish actions on the prices. The implied volatility on the stock has an indication that the stock are skewed to the options determining its investors or persons who may want to invest in the company as bullish, neutral or bearish. This is a sure sign that the company is prospective for investments from across the divide. Most of the investors it attracts as a result have been found to be majorly buying significant amounts of call and put option contracts. The rising stock prices by the company are majorly attributed to the ever rising earnings of the company as well as its recognizable revenue growth. EBay being an established company that has made name as a pioneer in the internet commerce has realized an increase or growth in its stock in the recent years though it is currently pulling back. The investors are though pleased given that year in year out, eBay has been the market leaders in its markets of operations. News events Amazon Recent events Amazon has been on the path of massive growth with its soaring stock prices. It has realized this through massive mergers and acquisitions in its efforts to compete diversified portfolios like those of eBay. In such efforts the firm has as well striven to remain relevant in terms of its technological operations. Its most recent acquisition is when it acquired Gopago and this is to advance its sales to its customers through the point of sale platform that is smartphone based. This acquisition has enabled the company be in the position of allowing its consumers to buy good and conduct pre-payments via android. The company is exploiting the option at a time when mo0st corporations are targeting the POS software or service market eBay being among the companies competing for the same service to expand its transactions. The online and mobile payments service by this company seems to be on its expansion path given it recently launched a fully-fledged PayPal rival as service that is accessible to all amazon account holders. PayPal is as well not left behind since it as well bought another rival by the names Braintree. Among its recent acquisitions to increase its market and consumer base is the acquisition of the online math instruction provider, Tenmarks. This is a tool that provides customized online math courses and the company mentions that the program has been used widely, actually by tens of thousands of students in schools. The company intends to expand this tool by developing rich educational contents as well as applications on a variety of its platforms. Among the enriched contents will entail an integration of Tenmarks services with amazon Kindle hardware a project which is likely to increase the sale of the Kindle textbook. This is attractive to investors as the projects are all geared towards increasing the earnings and profitability of Amazon. EBay Recent events From the above mentioned comparison we are able to see that Amazon and eBay are rivals in the highly volatile market that is the internet. Growth is therefore one of their strong points of competition and both the companies strive to attain this through mergers and acquisition in an effort to increase their customer and hence market base. The most recent acquisition by eBay is the decision by its strategic team to increase its stake in Snapdeal which is India’s largest online retailer at Rs 830 crore. This is to enable it compete at par with its stiff competitors like Flipkart and Amazon in a market that is considered to exhibit a faster growth (Fox, 2006). In this acquisition eBay is reported to now own between 35% and 40% of the company though the clear financial details are not known. India’s online retail sector is on the boom and it is expected to grow to a size of $56 billion by the year 2023. This is an attractive growth path for a firm that is second to Amazon in its home market. Merger and acquisition is the main growth path of eBay and the company had acquired over 40 companies at the end of the year 2013 (Fox, 2006). Its biggest within this period was the acquisition of Skype to a tune of $2.6 billion. From 2010 to date eBay has acquired Magento for $225 million, RedLaser for $10 million, Millo.com for $75 million and GSI Commerce for $2.4 billion among many others. The growth path of the company has made its investors happy and as well attracted even more investors. This is due to the growth in its profitability and earnings for its investors (Fox, 2006). Financial analysis The financial analysis of the two companies will be possible through the use of financial ratio analysis. Through these ratios we will be able to make decisions as to whether prospective investors should invest in the company based on the profitability, liquidity, gearing and investment ratios (Drake & Fabozzi, 2008). Amazon Financial Analysis Under Profitability ratios we will look at the Return on Sales Ratio. These are the return on investment ratios that indicates profitability as well as returns realized by the investors. Profitability performance for Amazon for years 2012 and 2013 will be as follows; RATIO FORMULA 2013 2012 RETURN ON SALES (Net Profit/Net Sale)*100 (82/16,070)*100 =0.51% (130 /13,185)* 100 =0.99% This ratio as an indicator of profitability shows a drop in profitability from the year 2012 to 2013 of 0.99% and 0.51% respectively. However, the firm is still in a position of covering all its costs and it is therefore worth taking a risk to invest in this firm. The result of this may be due to a decrease in sales and hence sales must be increased. Under efficiency ratios we will look at the inventory turnover ratio. This ratio compares items from both the income statement and the balance sheet and it indicates the efficiency of the company in turning inventory, sales assets, debtors as well as creditor. RATIO FORMULA 2013 2012 Inventory turnover ratio Net Sales/Inventory 16,070/5,395 =2.97 times 13,185 / 6,031 =2.18 times The company’s ability of converting inventory has improved from that of the year 2012 of 2.18 times to that of 2013 of 2.97 times. The company is therefore able to take care of its short term obligations on and average basis of 2.5 times which is quite healthy. Under the liquidity ratios we will look at the current ratio and we will see the extent to which this company is able to take care of its long term and short term obligations. RATIO FORMULA 2013 2012 Current Ratio Current Assets/Current Liabilities 16313/ 14,332 =1.34:1 21,296 / 19,002 =1.12:1 For a healthy company this ratio should be at a standard of 2:1, the company’s ability to take care of the obligations above given the ratios of 1.34:1 in 2013 and 1.12:1 of 2012 is in doubt though the ability has improved and shows the trends of even increasing further. In looking at investment returns we will resort to the EPS and this will tell us whether the investors can continue investing in the company or whether they should withdraw their funds. RATIO FORMULA 2013 2012 EPS Basic and Diluted $0.18 and $0.18 $0.29 and $0.29 This company’s performance has all the indications of a deteriorating firm and hence investing in it means taking a huge risk. The deterioration is even noted by the decline in EPS as shown by the ratios above. EBay financial Analysis To enable a comparison we will use similar ratios as used in Amazon case and they will be extracted from financial statements of the same time period. Onto profitability; RATIO FORMULA 2013 2012 RETURN ON SALES (Net Profit/Net Sale)*100 (850/4530)*100 =18.97% (751 /3992)* 100 =18.81% The profitability indicators for eBay are quite higher and more constant. This profitability is attractive for investments as the shareholders will be assured of good returns. The firm also has prospective of future growth given it is able to cover its costs adequately. RATIO FORMULA 2013 2012 Inventory turnover ratio Net Sales/Inventory 4530/1310 =3.5times 3992 / 914 6,031 =4.36 times The inventory turnover ratio is quite high though it has indicated a decrease over the two years. This shows that the firm is efficient in converting inventory and sales assets and this means that the firm is more than able to take care of its short term obligations (Drake & Fabozzi, 2008). Investments in this firm are a sure one as the investors will never have to worry about an outcome of any form of liability resulting from failure of payment of debts. RATIO FORMULA 2013 2012 Current Ratio Current Assets/Current Liabilities 23,283/ 12,639 =1.8:1 21,398 / 10924 =1.96:1 The current ratio is slightly below the standard of 2:1 meaning there is an availability of adequate working capital to current assets and the firm is therefore able to take care of its short term obligations. This enhances further the decisions to invest in this firm (Drake & Fabozzi, 2008). The investment ratio that is the EPS will be as follows; RATIO FORMULA 2013 2012 EPS Basic and Diluted $0.66 and $0.65 $0.58 and $0.57 These ratios are as well quite impressive and investors who are interested in dividends are likely to reap more as compared to when they invested in Amazon.com. Recommendation Based on the data above of profitability, efficiency, ability to take care of short term obligations as well as return in terms of earnings to shareholders, I would recommend and investment in EBay incorporation. This is because according to prices of its stock and investors may be able to acquire a lot of these shares and according to its EPS, they will earn a lot of dividends annually. This is as opposed to the Amazon shares whose current values are quite high coupled with deteriorating performance as indicated by the calculated ratios. Investors with long term ambitions can on the other hand try their hand on Amazon. References BELEW, S. (2011). Starting an online business all-in-one for dummies. Hoboken: John Wiley. Drake, P., & Fabozzi, F. J. (2008). Analysis of financial statements (Third ed.). Oxford University: Oxford Publishers. EBAY Historical Prices | eBay Inc. Stock - Yahoo! Finance. (n.d.). EBAY Historical Prices | eBay Inc. Stock - Yahoo! Finance. Retrieved March 12, 2014, from http://finance.yahoo.com/q/hp?s=EBAY&a=00&b=1&c=2010&d=11&e=31&f=2012&g=d Fox, S. C. (2006). Internet riches: the simple money-making secrets of online millionaires. New York: AMACOM, American Management Association. Quotes & Info- Yahoo! Finance. (n.d.). Quotes & Info- Yahoo! Finance. Retrieved March 12, 2014, from http://finance.yahoo.com/q;_ylt=Ag8zXEaITDCmaivJkYxdqcsgBrgF;_ylc=X1MDMjE0MjQ3ODk0OARfcgMyBGZyA3VoM19maW5hbmNlX3dlYl9ncwRmcjIDc2EtZ3AEZ3ByaWQDBG5fZ3BzAzEwBG9yaWdpbgNmaW5hbmNlLnlhaG9vLmNvbQRwb3MDMQRwcXN0cgMEcXVlcnkDQU1aTiwEc2FjAzEEc2FvAzE-?p=http%3A%2F%2Ff Read More