E-commerce: Sectoral Analysis Reveals Overstock As Potential Winner

E-commerce sector analysis

In our recent article on Amazon, we highlighted the current risks associated with Amazon stock as it faces stiff challenges to continue growing at the scorching rates investors have come to associate with it. If not Amazon, then which is the best pick from the e-commerce world? That is precisely what our article today focuses on, comparing eBay (NASDAQ:EBAY), Amazon (NASDAQ:AMZN) and Overstock (NASDAQ:OSTK).

Revenue growth

We had highlighted in our earlier article that Amazon clearly is growing at a rapid pace as compared to eBay. Let’s now extend the comparison to Overstock and see how the three fare on the scale of topline growth.

Revnue growth comparison of eBay Amazon and Overstock

It is clear from the above chart that Amazon has been the fastest growing enterprise in the e-commerce space averaging 30.2% revenue growth for the period 2004-2013, against 19.3% for EBAY and 11.4% for Overstock. The gains to stockholders have been phenomenal too. The table below lists the average share gains and average topline growth rate for the period 2004-2013

eBay Amazon Overstock
Topline CAGR (2004-2013) 19.3% 30.2% 11.4%
Average yearly share price gains 6.03% 27.41% -3.63%

The market has valued growth in the sector, giving little thought to profitability. Amazon has been the highest gaining stock among the three inspite of stagnant or near-zero profits over much of the last decade. On the other hand eBay, with good topline growth and greater focus on earnings has significantly trailed Amazon in stock price gains.

Let’s now evaluate the future potential of each of these stocks based on the potential changes in fundamentals over the coming years and current valuation multiples of these firms. The concerns surrounding Amazon’s growth rate will hurt investors as the growth rate dips lower. The company will have to find a new source of value to convince shareholders once the growth story begins to fade, which is pretty evident going by the last few years and the data for the first two months as per channel advisor. Overstock has gained traction in topline growth in the last two years even as its peers have seen slowdown in growth. Therefore as far as growth is concerned, we think Amazon will face greater hurdles to justify its current valuations.

Relative valuation

Let’s now take a look at the current valuation multiples of each of these firms given in the following table.

eBay Amazon Overstock
LTM Price Earnings ratio (P/E) 21.34 641.98 21.10
LTM Price Sales ratio (P/E) 4.67* 2.34 0.39

*EBAY sales reported on commission basis against gross merchandise value for AMZN and OSTK

Overstock is clearly the most attractive among the three companies whether we evaluate the company using the P/S multiple or the P/E multiple. The fact that Amazon is seeing slowing growth and will have to transition to an earnings focused model sooner or later, makes P/E the multiple of choice to compare the three companies.


We see topline growth as a huge concern at Amazon. In the new scenario of slowing growth, Amazon’s model of operation with a growth focus will come under greater scrutiny as shareholders will seek earnings and earnings growth from a firm which has long ignored its bottom line. Slowing topline growth, as highlighted in this article on seekingalpha, only confirms the challenges that lie ahead of Amazon. This, in absence of significant traction in earnings could lead to huge downside risk going by the earnings growth currently factored into Amazon stock.

On account of these huge risks associated with Amazon, the choice for an investor seeking exposure to the e-commerce sector boils down to eBay or Overstock. Going by current valuation multiples especially the P/E, and recent performance, Overstock looks more likely to outgrow its current valuation, though the absence of stability in earnings is something which an investor will have to live with. On the other hand eBay, with a proven operating model would be a safer investment option as compared to Overstock given the earnings focus which is integral to the company’s operations. Therefore, for an investor with a flair for risk Overstock is worth a deeper look. On the other hand ebay would be our pick for investors with a smaller stomach for risks.

To see Amazon’s latest stock price movement, click here (NASDAQ:AMZN)

Virendra Singh Chauhan Virendra Singh Chauhan   on Amigobulls :

Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice.

Buying and selling of securities carries the risk of monetary losses.Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions.

Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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