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eBay, Amazon Earnings Previews: Missteps And Undervalued

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A slew of earnings reports are coming up in the next couple of weeks. eBay Inc (NASDAQ:EBAY) is scheduled to report on July 16, while Amazon.com, Inc. (NASDAQ:AMZN) is scheduled for on or around July 25.

eBay competition threat exaggerated

In a report dated July 10, 2014, Bernstein analysts Carlos Kirjner and Peter Paskhaver said they think eBay is largely an “execution story” and that worries about strong competition are overblown. The big question they want answered is whether eBay will be able to get enough new users for its Marketplace and offer its entire user base a shopping experience that is compelling enough to have its GMV grow either in line with or faster than e-commerce. Another thing they’re wondering about is whether the planned investments in PayPal will be effective to push TPV growth beyond expectations.

They say that although fundamentals don’t provide an easy answer to the two questions, they think it’s possible for eBay to answer yes at some point. They say a large quantity of U.S. users don’t realize the company has a fixed price business and that there’s no reason the company can’t grow that part of the business more slowly than e-commerce while “keeping auction GMV from ‘falling off a cliff.'” They also don’t see a reason for PayPal to give up its leadership position in online payments if management executes successfully.

eBay missteps are many

However, they don’t really like management’s execution recently. They note that the online auction site had to dramatically cut long-term guidance earlier this year and that there was a serious security breach requiring users to reset their passwords. In addition, Google demoted tens of thousands of eBay links as part of its recent algorithm change. Also they say PayPal’s CEO went to Facebook Inc (NASDAQ:FB) for a job that they don’t see as being a step up. And the company took a huge repatriation charge because it brought a large amount of cash home and never explained why it brought the money home.

The Bernstein analysts think many investors who have been in eBay for the long term are starting to lose patients with the company’s management. However, they are still patient, at least for “one or two more quarters.” They remain cautious around this month’s report because they expect more noise again.

When eBay reports next week, they’re looking for revenue of $4.472 billion and adjusted earnings of 69 cents per share. That’s compared to consensus estimates of $4.379 billion and earnings of 68 cents per share.

Amazon’s retail business undervalued

The Bernstein team also weighed in on Amazon’s upcoming earnings report. They believe the e-commerce company’s retail business is “doing well” and that Wall Street continues to undervalue it. They note that EGM revenue sped up again in the last quarter and that gross margins are still expanding. In addition, Amazon’s fulfilment expenses are growing more slowly than gross profits from the company’s retail segment.

This suggests that it has a strong trajectory even though Amazon has been heavily investing in expanding, particularly into China. The Bernstein analysts estimate that Amazon spent between $500 million and $700 million in China last year, which they think is enough to make the company “an attractive investment.”

AWS prices cut

They also note that Amazon cut the price of its Amazon Web Service in April, which they think was a response to Google Inc (NASDAQ:GOOGL) (NASDAQ:GOOG)’s price cuts the month before. They say the price decrease was “atypical in scope and depth” and that they believe it will negatively impact the company’s Other Revenues for the second quarter and also CSOI, possibly causing volatility in the company’s stock in the near term. They also believe that the reason Amazon’s second quarter CSOI guidance was weak was mainly due to the price cut in AWS.

When Amazon reports earnings later this month, they’re looking for consolidated revenue of $19.44 billion on non-GAAP earnings of 86 cents per share. That’s compared to consensus estimates of $19.301 billion in revenue and earnings of just 62 cents per share.

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