Strong eBay Results Bode Well For Amazon

20 Apr, 2012

EBay Inc's strong first quarter bodes well for Amazon.com Inc's results next week - especially Amazon's own online Marketplace business and e-commerce in general, analysts said on Thursday.

EBay shares surged to a six-year high after quarterly results showed the company's efforts to turn around its online Marketplaces business are paying off.

The results suggest "e-commerce growth is alive and well and that should bode well for others in the space, namely Amazon," said Scott Tilghman, an analyst at Caris & Company.

Amazon is scheduled to report first-quarter results on April 26. Wall Street expects the world's largest Internet retailer to report earnings of 7 cents per share on revenue of $12.86 billion, according to Thomson Reuters I/B/E/S.

Following eBay's results, Amazon's first-quarter revenue may match or beat Wall Street's forecast, said Gene Munster, an analyst at Piper Jaffray. He was expecting Amazon revenue to be $12.6 billion before eBay reported.

"EBay's marketplace remains healthy, suggesting macro e-commerce is healthy," Munster wrote in a Thursday note to investors.

Platforms, Not Retail

As the dominant Internet retailer, Amazon takes on inventory and sells millions of products online. But the company has also run its own Marketplace business for several years, allowing third-party merchants to sell to its customers through the platform, like eBay.

Known as 3P, Amazon's Marketplace has been growing faster than its main retail business. During the fourth quarter, 3P's growth took some on Wall Street by surprise and its emergence as a major Amazon business is changing the way analysts and investors think about the company.

Instead of a retailer, Amazon is an operator of online platforms that allow other businesses and entrepreneurs to make money, according to Carlos Kirjner, an analyst at Bernstein Research.

In a recent three-page letter to shareholders, Chief Executive Jeff Bezos did not mention Amazon's main retail business.

Instead he focused on "self-service" platforms like Fulfillment by Amazon, or FBA, which ships products for third-party sellers on the company's Marketplace.

"Bezos' letter provides food for thought for those on the Street who still think about (and model) Amazon as a retail business," Bernstein's Kirjner wrote in a Tuesday note to investors.

Profit Drivers

Service platforms like 3P, FBA, cloud computing unit Amazon Web Services and Kindle e-book publishing will be the driving force behind future profits, Kirjner added.

3P accounted for less than 10 per cent of Amazon's fourth-quarter revenue. But the business grew about 80 per cent in the period, while Amazon's main retail business grew about 30 per cent, Kirjner estimated.

More importantly for investors, 3P accounted for 40 per cent of Amazon's gross profit in the fourth quarter, the analyst estimated.

Online marketplaces and other platforms can be more profitable than traditional retail businesses, partly because marketplaces do not have to pay to buy products and store them as inventory, said Aaron Kessler, an analyst at Raymond James.

Amazon likely gets about 15 per cent of the revenue generated from third-party sales on its Marketplace, while it gets all of the money from its own retail sales, Kessler noted.

So as Amazon's Marketplace grows, the company's overall revenue growth may slow, but profit margins should increase, Kessler and others said.

That is because most of the revenue Amazon generates from third-party sales on its Marketplace falls straight to its bottom line as profit. Kirjner reckons Marketplace gross profit margins are 85 per cent to 90 per cent.

Kirjner expects Amazon's Marketplace to grow 70 per cent this year and 60 per cent in 2013. That should help Amazon's overall gross profit margins hit almost 25 per cent in 2013, up from 22.44 per cent last year, he estimated.