Amazon, eBay, or Overstock: Which Is the Best Buy?

Amazon, eBay, or Overstock: Which Is the Best Buy? has had a great year with gains of 109% but remains nearly 20% off its 52-week high. With that said, Overstock recovered some of its losses last week to trade higher by 10%. Yet, does this improved performance suggest that Overstock might now be a good buying opportunity; perhaps even better than its peers and eBay ?

Three similar businesses with a niche
When you look at the business model of Overstock, Amazon, and eBay, all are relatively similar, or have the same core focus. Each operates an e-commerce business, an online store, but have certain niches that make each unique.

Overstock is by far the smallest of the three and the least diverse. The company has implemented a loyalty program, giving consumers 5%-25% rewards on products.

eBay is often called the world's largest flea market, as many of the products are sold between users. However, the company also has PayPal, which returns large profits and is the main reason that eBay has an operating margin greater than 20%.

Moreover, PayPal is the key growth driver for eBay, as its revenue increased 20% to $1.6 billion in the company's last quarter, which is far better than the 12% growth in eBay's Marketplace. As of now, PayPal is 40% of the company's total revenue, but analysts expect that PayPal will be larger than Marketplace by 2015.

Lastly, there is Amazon, and it is one of the most disruptive companies in the market, effecting retailers with its industry-low pricing. While the company is preparing to make its grand debut in the grocery business, it is Amazon Web Services that has become the company's niche.

Amazon Web Services is Amazon's cloud business, both cloud app platforms (PaaS) and cloud infrastructure (laaS), but what many don't know is that Amazon is rapidly becoming a dominant name in cloud computing. With expected growth of 55% in 2013, AWS is estimated to produce annual sales of $3.5 billion in 2013.

In addition, analysts expect that sales will grow to $8.1 billion in the next two years, thus Evercore has assigned a whopping $50 billion valuation to the business.

Boring but cheap
While Overstock may be the most boring of the three e-commerce companies, not really having anything too unique, this doesn't necessarily mean that it's the worst investment opportunity.

For one, Amazon is pretty much a lock at 20% growth, but the company is spending aggressively and showing no signs of slowing down. Therefore, it's very hard to know for certain how growth will perform once the company stops reinvesting nearly all of its operating income.

eBay is a company that's struggling to produce double-digit growth in its Marketplace. Moreover, investors have very high expectations for the company to maintain its high margins, meaning eBay can't afford to reinvest at the same rate as Amazon due to expectations; if eBay's margins fall too much, so does its stock.

This leaves Overstock, a company with trailing-12-month revenue of $1.2 billion, estimated growth of 18.5% for the full year, and 30% net earnings growth. Therefore, Overstock is growing at the same level as its peers, and with an operating margin of 1.8%, it still has room to significantly improve its profits. Not to mention, Overstock is by far the cheapest of the three.








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As you look at the valuation metrics above, be sure to remember that P/E and forward P/E ratios might not be the best indicator of value.

These are popular among retail investors, but companies with different operating strategies might place higher levels of importance of bottom-line performance. Not to mention, net income can be tricky, as it's no secret that aggressive accounting can inflate net income.

With that said, operating income is a better reflection of potential earnings, or what a company could create in profit from operations alone. Therefore, a comparison of a company's valuation to its operating income might be a better way to determine its value, and also the amount of future profit that's possible. Clearly, Overstock is winning in this category at 12.8 times operating cash flow.

But the real metric where Overstock is golden is with its market capitalization compared to its annual sales. Remember, Overstock has a very low operating margin that is improving greatly. Therefore, a company that's cheap compared to sales can eventually produce higher profits if margins rise.

Throughout Overstock's two-year 283% return, its margins have outpaced revenue growth, and based on its valuation, there is still a significant amount of room to run higher.

Final thoughts
Overstock might not be the e-commerce market favorite; it might not be the sexiest pick; but Overstock has the best balance of growth and value within the industry.

Thus, an investor exploring this space and performing due diligence might be drawn to Amazon or eBay, but based on Overstock being five times cheaper than Amazon compared to sales and the capabilities to become more efficient, it clearly has the most upside potential.

Therefore, even with Overstock's large two-year gains, and its return last week, it's still likely that the best option to outperform the e-commerce industry in terms of stock performance is in fact Overstock.

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Brian Nichols owns Overstock. The Motley Fool recommends and eBay. The Motley Fool owns shares of and eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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