Investment Analysis Report: Amazon versus eBay - Research Paper Example

? Investment Analysis Report: Amazon versus eBay BY YOU YOUR SCHOOL INFO HERE HERE Investment Analysis Report Introduction Please find herewith an investment analysis report highlighting the investment potential of Amazon.com and eBay, two companies that have been publicly traded businesses since 1997 and 1998, respectively. Before making an investment recommendation, it is necessary to examine the stock performance of both businesses, gain insight into recent events occurring within the business model of both firms, consider an in-depth analysis of the financial position of the firms, and fully understand the company backgrounds and their products and services. This report analyzes the micro- and macro-level factors that will determine which firm is the most viable for investment opportunity. Company Backgrounds Since the time of its initial public offering, Amazon.com has evolved from primarily an online book and music seller to an extremely diversified business that now offers a broad range of products and services to business and consumer segment buyers. In 1997, Amazon had achieved significant consumer interest in online shopping for over 1.5 million books that revolutionized the process of ordering products online. This led to an initial public offering at a stock price of $18, which in a single day of trading jumped to $30 per share due to the high investor confidence in the firm’s cash flow, intentions for improving the online sales model, and consumer sentiment about the evolving online shopping environment. After receiving considerable capital growth from the IPO, which equated to $900 million on 30 million shares initially released, the company was now equipped to build new distribution facilities, expand its marketing presence, and allow the company to acquire established book-sellers such as Telebook, Bookpages and The Internet Movie Database (Advameg, 2013). These acquisitions expanded the company’s international presence and allowed the company to establish barriers to new market entrants in the online book sales industry by essentially monopolizing the sales environment. By 2002, the company was boasting a whopping $3.9 billion in sales, though the firm was unable (in 2002) to reduce its high costs of operations which led to reporting of negative net income between 1998 and 2002, which worried investors about the future of the company. Between 2000 and 2004, Amazon.com expanded its offerings to include partnered sellers that were allowed to promote and sell non-book merchandise on the Amazon.com website. This allowed Amazon to expand not only its brand presence, but also get consumers familiar with the perception that Amazon was a leader in not only books, but in technology, customer service, music and video. Opening the doors for a new distribution channel through third-party sales significantly improved its revenue production capabilities, allowing the company to recuperate initial losses while the business was developing its more diversified business model. Today, Amazon provides cloud computing, a wholly self-managed opportunity for customers to use innovative software packages without having to invest in these systems independently. Cloud computing is giving customers access to shared technologies and server storage, an on-demand network of computing resources (Kundra, 2011, p.4). This opened the doors for Amazon.com to cater to not only the consumer segment, but business professionals that had neither the resources nor talents to develop their own information technology architecture. Other diversified services as a product of aggressive innovation and research and development talent internally include the Kindle Direct Publishing business unit, allowing inspired musicians, authors and application developers to market their products using Amazon.com as a platform (Yahoo! Finance, 2013). Coupled with its countless millions of diverse consumer-centric products ranging from home decor to video services, Amazon is now established as a company with considerable brand loyalty in certain product categories that continues to outperform competition in the online sales environment for its dedication to expanding Amazon’s strategic brand position domestically and internationally. eBay, since its initial public offering in 1998, has also significantly diversified its business model to include multiple business units and strategies. At the time of the IPO which was valued at $53.50, the company has had its share of financial ups and downs that have impacted its stock price and business strategic direction. Initially, eBay was a foremost leader in online auctioning that allowed consumers to sell their own personal merchandise or establish a business presence to sell new merchandise at affordable prices. It was not, however, until the company’s introduction of Paypal, a leading online payment service, that eBay began to build capital that could improve the business and expand its offerings. With Paypal, consumers could not send and receive payments virtually using a personal computer or through their mobile devices. The volume of consumer and businessperson interest in using this revolutionary payment service provided eBay with explosive revenues for the fees and service charges placed on every single transaction utilizing eBay as the sales medium. The initial IPO also provided eBay with the ability to invest capital into a variety of business acquisitions, such as Shopping.com and Bill Me Later, which further expanded the business’ brand presence and provided opportunities to gain more target market interest domestically and internationally. In 2003, eBay boasted sales revenues of $2.17 billion (Reference for Business, 2013). Today, eBay is still considered a leader in the online auction industry, expanding into more than just consumer products, but a variety of large ticket products ranging from automobiles to fine art. In modern society, eBay has a very well-recognized brand reputation and maintains presence in approximately 20 countries that utilize eBay as their preferred sales channel to facilitate easier promotion of product at an affordable commission cost. It was through the transformational leadership style of previous CEO Meg Whitman, establishing a vision and mission and then reinforcing this throughout the first 10 years of operation, that eBay was able to become a leader in customer service and diverse product availability. The Historical Stock Performance of Amazon and eBay This section illustrates and justifies the historical stock performance of both companies from the time of their initial public offering to January 1, 2012 with supplementary commentaries describing the rationale for the historical market performance. As illustrated by Amazon.com’s stock performance chart, the company experienced a massive increase in common stock valuation from the initial IPO of $18 to $133.52 in January 2010. Amazon was a pioneering company in the online sales industry, therefore setting the standard in certain product categories. Buchanan and Huczynski (2010) indicate that only successful companies are able to observe trends in the external environment and then make responsive changes to the business model in order to adapt. Being the first market mover, Amazon quickly built up brand recognition and even brand loyalty, which outperformed bricks-and-mortar bookstores such as Barnes & Noble. As a pioneering company, consumer behavior theory indicates that first movers often have advantages over later entrants as consumers become attached to the brand and often judge late movers negatively so long as the pioneer is able to provide effective customer service and satisfaction (Kalyanaram and Gurumurthy, 2008). Though it is not to say that Amazon was not successful in marketing and promotion, the basis of human behavior in consumption decision-making, as a pioneer, gave Amazon considerable brand loyalty early in its operating model. According to Chaudhuri and Holbrook (2001) customers who are attached to a brand are willing to increase their expenditures on favorite branded products and provide significant word-of-mouth advantages for the business they have loyalty with. As illustrated by the stock performance chart, Amazon.com had achieved such significant revenues and investor confidence by the mid-2000s that the stock increased 739 percent from its initial IPO. Furthermore, since Amazon performs the majority of its business, less distribution, online, once the company invests in the software and hardware systems required to facilitate more efficient and productive business as well as customer relationship management, no further investment is required until the systems become outdated. As such, Amazon.com was able, and is still capable, of reducing or completely eliminating certain operational expenses that are common in the bricks-and-mortar retailing industry. This provides the business with more substantial cash flow and profitability when taking into consideration the cost of goods sold. Additionally, Amazon has a very decentralized model of business in which frugality is considered a cultural norm. Amazon is able to come up with more innovative ideas through this decentralization, allowing information to move horizontally rather than vertically. Stover (2004) supports that when this type of interaction occurs internally between tacit knowledge holders, it provides for better knowledge management functioning and essentially teaches the entire organizational staff about specialist activities (e.g. technology and marketing) to create more productive human capital. Amazon is therefore able to eliminate cost redundancies and streamline operational performance through decentralization, leading to more profitability rather than having to extend capital investment for costly asset procurement. This has given the business the ability to justify to investors that the majority of its revenues are serving the business model, thereby reducing investor sentiment of risk about the long-term investment capability of this company. eBay, on the other hand, has struggled significantly with removing its operational costs and building profit that can be applied to other strategic opportunities such as further acquisitions or innovation in service delivery strategy. At the time of the initial public offering, the stock value was $53.50 which occurred in a single day of trading from the estimated stock valuation of $14. This is because, like Amazon.com, eBay was a pioneering firm in the online auction and sales environment, having invested considerable financial resources into promoting the brand on television and a variety of other mediums. Investor and consumer confidence about the firm’s direction and longevity were substantially positive. However, as illustrated by the eBay stock performance chart (below) the business has failed to regain this same sentiment, even in more recent periods between 2010 and 2012. As shown by eBay’s stock chart, the company has been less successful in removing the operational costs of performing business and service modeling. In fact, the company’s 2011 annual report indicates that operating expenses are 70 percent of total assets, including revenues (eBay Inc, 2011). The regulatory environment, increase in international competition, challenges in establishing joint ventures and other alliance partnerships with foreign partners, and extended accounts receivable problems have been cited for some of the problems with establishing a more effective and profitable business model (eBay Inc, 2011). Recent Events Impacting Stock Performance In 2011, Amazon.com established its Price Check application for smartphones which allowed consumers to scan merchandise at virtually any retailer and then receive an instant price comparison for Amazon if it carried this merchandise (Siwicki, 2011). This revolutionized even more incentives in promotion for customers that gave a new meaning to the Amazon model for the price-sensitive buyer that makes decisions based on pricing as a primary criterion. The company even promoted that customers would receive an additional $5 off the price for scanning and taking advantage of the Price Check application services. This is a further example of how Amazon is flexible and responsive to changing external market conditions to better service customers under a CRM model, thus building higher revenue growth. Amazon.com had also built up such a wide amount of consumer loyalty that it was listed as the number three search engine (the business is NOT a search engine) when searching for products online (Business Wire, 2010). The importance of establishing loyal consumer segments cannot be understated and is reflected in the stock performance chart of Amazon. Significant growth in brand loyal consumer segments fuels considerable investor sentiment. eBay, on the other hand, lost a great deal of this loyalty in 2010 when the company began changing the commission fees on the website and attempted to block independent sellers from posting negative comments when they experienced poor sales situations (Clifford, 2010). Negative publicity can fuel lack of consumer and investor interest in the business as well as drive once brand-loyal consumers to other business models. eBay had been unable to create market barriers for new entrants in the United States and many other foreign countries and the switching costs for consumers to use lower-cost auctioning sites were very low. Additionally, people utilize online auction sites as a means of gaining a much better return on investment as compared to the manufactured retail suggested price. When eBay began to increase Paypal commissions alongside eBay commissions, many buyers were feeling the economic pinch of dual charges for low-cost merchandise. This made up a significant portion of the company’s consumer target segments. As such, brand defection was common while the company was also struggling with higher operational costs domestic and international. This explains much of the stock performance failures between 2008 and 2012. Recommendations for Investment Ebay, as described by the research, maintains significant revenues of over $9 billion as reported by the company’s 2011 annual report, but cannot remove 70 percent of the cost burdens for cost of goods sold. As such, the net income of the business in January 2012 was much lower than what would be considered industry norms. These costs are associated with regulation fees, continuing acquisitions which fail to meet expectations, and establishment of joint ventures that are not providing ample capital growth. Amazon.com, however, is much more adept in lowering cost of goods sold by staying true to a frugal and streamlined model of investment and holding off on further investments until properly innovating and sustaining an existing business function. This provided Amazon with over $2 billion in free cash flow in 2009, 2010 and 2011, allowing the business to invest in a variety of business improvements without the need for financing or further stock issuance for capital procurement. The most viable investment company tends to speak for itself, and should be considered Amazon.com for its management prowess, ability to respond to changing market conditions, avoid negative publicity, and ensure adequate cash availability rather than relying on costly financing options. eBay simply cannot drive out growth in competition with very competitive pricing and marketing talent that provides a more powerful domestic and international auction brand. The data provided by both company’s annual reports that highlighted financial position and risk, along with industry-centric sentiment about the viability of both companies should be considered valid and quantitative data that justifies making an investment decision. It is clear that Amazon.com has the most potential for return on investment and should be considered a paramount investment objective over that of eBay. References Advameg. (2013). Amazon.com, Inc. - Company Profile, Information, Business Description, History, Background Information on Amazon.com, Inc. Retrieved May 18, 2013 from http://www.referenceforbusiness.com/history2/35/Amazon-com-Inc.html Buchanan, D.A. and Huczynski, A.A. (2010). Organizational Behavior (7th ed.) Essex: Pearson. Business Wire. (2010). 2010 Social Shopping Study Reveals Changes in Online Shopping Habits and Usage of Customer Reviews. Retrieved May 17, 2013 from http://www.businesswire.com/news/home/20100503005110/en/2010-Social-Shopping- Study-Reveals-Consumers%E2%80%99-Online Chaudhuri, A. & Holbrook, M.B. (2001). The Chain of Effects from Brand Trust and Brand Affect to Brand Performance: The role of brand loyalty, Journal of Marketing, 65(2), pp.81-93. Clifford, Catherine. (2010). eBay sellers’ rebellion: The aftermath, CNN Money. Retrieved May 18, 2013 from http://money.cnn.com/2010/01/20/smallbusiness/ebay_aftermath/ eBay Inc. (2011). Form 10-K: Annual Report 2011. Retrieved May 17, 2013 from http://files.shareholder.com/downloads/ebay/2493503583x0xS1065088-13- 4/1065088/filing.pdf Kalyanaram, Gurumurthy and Gurumurthy, Ragu. (2008). Market Entry Strategies: Pioneers Versus Late Arrivals, Wright University. Retrieved May 17, 2013 from http://www.wright.edu/~tdung/entry.pdf Kundra, Vivek. (2011). US Chief Information Officer: Federal Cloud Computing Strategy. Retrieved May 19, 2013 from http://www.cio.gov/documents/federal-cloud-computing- strategy.pdf. Reference for Business. (2013). eBay Inc. - Company Profile, Information, Business Description, History, Background Information on eBay Inc. Retrieved May 18, 2013 from http://www.referenceforbusiness.com/history2/44/eBay-Inc.html Siwicki, B. (2011). While some still cry, others Fight back, Internet Retailer. Retrieved May 17, 2013 from http://www.internetretailer.com/commentary/2011/12/22/while-some-still- cry-others-fight-back Stover, M. (2004). Making Tacit Knowledge Explicit, Reference Services Review, 32(2), pp. 164-173. Yahoo! Finance. (2013). Profile: Amazon.com. Retrieved May 18, 2013 from http://finance.yahoo.com/q/pr?s=AMZN+Profile Read More