Amazon Versus Ebay

V. Prospective Analysis:

Forecast Horizon:

EBAY & AMZN: We chose 6 years as the forecast horizon for EBAY and AMZN. This basically represents the Capex cycle for the firm (e.g. the amount of time it takes the company to make capital out lays to grow the company and then begin to grow revenue because of those investments). We are also forecasting higher revenue growth rates and tighter margins over the next 4-5 years. We expect both to close in on their long-term rates by the 6 year mark. Additionally, the higher revenue growth rates of the initial forecast years lead to higher turnover ratios for AR, Inv and AP during those years. We expect those to approximate long-term turnover ratios by the 6 year mark.

Sales Growth:

AMZN: Amazon’s revenue growth rate was approaching 40% before the recession hit in 2008 when it dropped down to 27%. However, recent unit and customer growth have been rising at record levels. Between consumers returning to the market, the infrastructure investments AMZN has been making and the recent rapid growth in online retailing we see the growth rate reaching 34% over the next 3 years. We then predict it will decline to a long-term rate of 23% by 2016. (Exhibit 12)

EBAY: Ebay also saw rapid revenue growth before the recession (30%) before falling to 2% in 2009. Growth in their PayPal business is being led by mobile based payments and the “Bill Me Later” function. A resurgence in the Market place segment is being driven by a revamped user interface and improved customer trust and loyalty. These growth drivers will push revenue growth to 19% through 2013 before falling to 12% through 2016.

Margins:

AMZN: The recent launch of the Kindle Fire will compress margins in the short-term as Amazon plans to forego profit on hardware sales in order to increase profit on content sales going forward. We modeled a 21% gross profit margin through 2014 and it increases to 22% in 2015. (Exhibit 12)

EBAY: Ebay has shown an increasing trend in profitability over the past 6 years as gross profit margin has increased. We expect that to hold constant over the next 3 years as Ebay receives a larger portion of its revenue from the higher margin PayPal segment. After 2013 the gross margin will increase to 70% with the resurgence in the marketplace division. (Exhibit 12)

Working Capital Management:

AMZN: We modeled constant turnover ratios for AP, Inv and AR. A major competitive advantage for Amazon is its ability to efficiently turnover its assets and we expect that to continue into the future. (Exhibit 13)

EBAY: Ebay’s business model naturally leads to lower levels of working capital than most retailers since they don’t carry inventory. We forecasted a constant AR turnover ratio of 3.9x going forward. However, we