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Amazon.com vs. eBay; Who Will Win?

Friday, August 17th, 2012
By for Profit Confidential

Amazon.com vs. eBay; Who Will Win?Competition with technology stocks is going beyond product offerings and is now encroaching on delivery options. With reports that Amazon.com, Inc. (NASDAQ/AMZN) has been working on a same-day delivery option to help differentiate itself from the competition and ultimately drive corporate earnings, word has just been released from eBay Inc. (NASDAQ/EBAY) that it too is trying the same-day delivery option. eBay is initially trying a test run in San Francisco to determine if the service is worth the extra effort.

This type of competition between technology stocks is great for consumers, but it can be a headache for investors trying to determine future corporate earnings levels. Even though revenue can increase, corporate earnings can decline because of the costs associated with the establishment of distribution warehouses and logistical software; running a same-day operation is not a simple offering. Technology stocks that continue to innovate usually do come out on top, and it is nice to see eBay back on the offensive. Even as rumors kept popping up regarding Amazon.com’s delivery options, eBay actually began its trial run first.

Both of these technology stocks will only see a marginal increase, if any, in corporate earnings because of the delivery service itself. The thinking behind the strategy is that it will help drive traffic to their existing products, which have a higher profit margin, and the net effect will be a total rise in corporate earnings.

Amazon.com already has a delivery service called “Prime;” for $79.00 a year, members get free two-day delivery on many products. The firm doesn’t break out specific numbers for the service, but rumors are that it isn’t making any corporate earnings from delivery offerings already, perhaps even losing money. Going to a more demanding same-day service would most likely be a negative for corporate earnings going forward.

Amazon.com Inc Chart

Chart courtesy of www.StockCharts.com.

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I do think it’s far too early to rate how both of these technology stocks will do when it comes to same-day delivery service. To make an estimate of corporate earnings at this point would be premature. There is, of course, the problem that because of the intense competition between these technology stocks, even if corporate earnings get hit, they would still need to offer such a delivery service just to keep up with each other.

One of the main drivers for eBay won’t be just same-day delivery, but the growth of “PayPal,” its payment business. As eBay continues to roll out PayPal to more businesses and different delivery methods, this will be the real driver for corporate earnings. I think that if eBay were to spin off PayPal on its own, this would be the business to own over the next decade.

eBay Inc. Chart

Chart courtesy of www.StockCharts.com.

While I like the competition between these technology stocks in their efforts to drive corporate earnings over the long term, I need to see the execution of these efforts before I can properly calculate how they will impact each company. Amazon.com is a great logistics business, but it only has a tiny profit margin, which means relatively small corporate earnings based on its revenue. eBay isn’t as strong in logistics, but it has PayPal to help drive corporate earnings.

Both technology stocks have had excellent years, as investors believe that both are able to drive corporate earnings. The question, will the costs associated with new initiatives be more than made up for in revenue gains? If not, corporate earnings might suffer, but if these technology stocks are able to increase the overall size of the market pie, then this will have been an innovative idea. Only time will tell.

I would wait and see how this San Francisco experiment works out before passing judgment. After all, if eBay is successful there, moving to other dense cities, like New York, should also be possible. However, this would also alert Amazon.com that there is money to be made with this delivery option, and you can bet that these technology stocks will continue to battle it out.

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Sasha Cekerevac - Investment Advisor, Fund AnalyzerSasha Cekerevac, BA Economics with Finance specialization, is a Senior Editor at Lombardi Financial. He worked for CIBC World Markets for several years before moving to a top hedge fund, with assets under management of over $1.0 billion. He has comprehensive knowledge of institutional money flow; how the big funds analyze and execute their trades in the market. With a thorough understanding of both fundamental and technical subjects, Sasha offers a roadmap into how the markets really function and what to look for as an investor. His newsletters provide an experienced perspective on what the big funds are planning and how you can profit from it. He is the editor of several of Lombardi’s popular financial newsletters, including Payload Stocks and Pump & Dump Alert. Add Sasha Cekerevac to your Google+ circles