Strong eBay Q1 results bode well for Amazon

SAN FRANCISCO: 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, according to analysts.
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 & Co.
Amazon
is scheduled to report first-quarter results on Thursday. Wall Street
expects the world’s largest Internet retailer to report earnings of 7
cents per share on revenue of US$12.86bil.
Following eBay’s
results, Amazon’s first-quarter revenue might match or beat Wall
Street’s forecast, said Gene Munster, an analyst at Piper Jaffray. He
was expecting Amazon revenue to be US$12.6bil before eBay reported. –
Reuters
“EBay’s marketplace remains healthy, suggesting macro ec-ommerce is healthy,” Munster wrote in a note to investors. – Reuters
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 thirdparty 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 threepage letter to shareholders, Chief Executive Jeff Bezos did not mention Amazon’s main retail business.
Instead
he focused on “selfservice” platforms like Fulfillment by Amazon, or
FBA, which ships products for thirdparty 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.
PRODUCT, SERVICES SPLIT
When Amazon
unveiled fourthquarter results at the end of January, the company
reported Product sales separately from Services sales for the first
time.
Product sales are mostly Amazon’s retail business, while
Services include the company’s Marketplace and other newer businesses
such as the cloud computing unit Amazon Web Services, or AWS.
“Just
the fact that we have that number now and the margin structure is so
different means that investors will focus a lot more on 3P,” said Ben
Schachter, an analyst at Macquarie.
PROFIT DRIVERS
Service platforms like 3P, FBA, AWS and Kindle ebook publishing will be the driving force behind future profits, Kirjner added.
3P
accounted for less than 10 percent of Amazon’s fourthquarter revenue.
But the business grew about 80 percent in the period, while Amazon’s
main retail business grew about 30 percent, Kirjner estimated.
More
importantly for investors, 3P accounted for 40 percent 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
percent of the revenue generated from thirdparty 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 thirdparty sales on its Marketplace falls
straight to its bottom line as profit. Schachter reckons Marketplace
gross profit margins are close to 100 percent, a lot higher than
margins on Amazon’s retail sales.
Kirjner expects Amazon’s
Marketplace to grow 70 percent this year and 60 percent in 2013. That
should help Amazon’s overall gross profit margins hit almost 25 percent
in 2013, up from 22.44 percent last year, he estimated. (Reporting By
Alistair Barr; Editing by Gerald E. McCormick, Gunna Dickson and Carol
Bishopric)