4.0 Major business activities
Amazon has consolidated its status as the largest online retailer in America by starting as an online bookstore and then diversifying its products from CDs, video games and electronics to furniture, toys and food. On May 15th, 1997, Amazon.com issued its first public stock by means of IPO (Frey and Cook, 2004). In 2005, Amazon entered S&P 500 index (Regan, 2005). Amazon has also incorporated plenty of products and service into its online shopping model. A case in point is the Honor System, which was used to collect donations from online customers since 2001but discontinued in 2008 (Gunn, 2008).
As the online auction website, eBay offers a platform where people and companies are able to sell and buy a variety of products and service. Beginning with the name of Electronic Travel Auction, it officially changed the name to eBay in 1997. By keeping on expanding the categories of items of business, it grew dramatically and purchased IBazar, a similar European auction website, in 1995 as well as PayPal in 2002 (Regan, 2002). EBay cooperated with the sales of Skype in 2009 and created the record of $ 2.75 billion (Robin, 2009).
5.0 Financial analysis
5.1analysis of Amazon
Exhibit 1 income statement of Amazon.com from 1999 to 2008
(Morning Star, 2009a)
The given table shows the situation of income for Amazon.com in the past ten years. It is clear that the overall revenue increased steadily from 1999 to 2004, when a continuingly dramatic increase occurred in the overall revenue, exceeding $ 21,692 million. Similarly, the COGS (cost of revenue) grew to $ 14,896 million in 2008, more than ten times as much as it in 1999. Hence, the Gross Profit rose from $ 290.7 million in 1999 to $ 4,270 million in 2008, which is nearly $ 1000 million more than that in 2007. The figures and the increasing trends are demonstration that Amazon’s ability to gain profit is becoming stronger and stronger. Meanwhile, the company is developing its business while the cost of this is inevitably growing. At the same time, this table reflects that Amazon.com has been investing increasing capital in the R&D projects while the net income began to rock after the bottom in 2003.
Table 2 Balance sheet of Amazon.com from 1999 to 2008
(Morning Star, 2009b)
According to the given balance sheet of Amazon.com from 1999 to 2009, it is obvious that the total asset was up by $ 6,500.4 million during the past decade, with the figures $ 6,485 million in 2008 and $ 8,314 million in 2009 respectively. The net income, the distance between the total assess and the total liabilities, was increasing steadily. Apparently, the proportion of cash among the asset increased remarkably and it has become the largest part of the total current assets as well as the total assets. Besides, Amazon.com has enlarged its securities issuing since the intangible assets has greatly increased after 2003. It is worth to mention that Amazon.com reduced its long-term debt from $ 1,282 million to $ 409 million, which means that the situation of Amazon’s debt has been mitigated and the company is able to concentrate on gaining profits.
Table 3 cash flow of Amazon.com from 1999 to 2008
(Morning Star, 2009c)
It is immediately clear from the cash flow sheet that the in 2002,2003,2004,2008 and especially in 2007, cash from operation took the considerable part of the total cash flow, which reveals that the company experienced good operation, comparatively lower risk and a reasonable structure of cash flow.
Table 4 detailed annual cash flow of Amazon.com from 2005 to 2008
(Amazon.com, 2009)
In 2008, the ratio of cash from issuing Stock to Debt was 89.00 to 268.00 ($ million) while the ratio in 2007 was 157.00 to 50.00 ($ million). That ratio in the past two years (2005 and 2005) were less than 1, which shows that only in 2007 the company face less pressure from debt and possessed vast capital, experiencing lower financial risk. In addition, the ratio of Net Income to the total cash from operating activities was 359:733 ($ million) in 2005. After this peak, the ratio bottomed in 2006, followed by gradual rise in the following two years (645:1,697 in 2008). This ratio illustrates that the company performed its core ability better and better and operated its main business well with an excellent and successful marketing strategies.
5.2 Analysis of eBay
Table 5 income statement from 1999 to2008
(Morning Star, 2009d)
From this sheet, it is clear that the past decades witnessed the significant growth in the gross profit in eBay, which demonstrates that the competence and market shares of eBay increased. The ration of operating income to revenue shows that in 1999 eBay’s ability of gain profits was extremely weak but the ratio rose in the following years with some fluctuations in 2006 and 2007, which reveals that this ability was becoming stronger generally. The percentage of other items in operating expenses to revenue was about 0.02 (5.5/224.7) in 1999 and around 0.01(5.3/431.4) in 2000, respectively. This percentage remained less than 0.05 but rocked to 0.2 in 2007 and over 0.07 in 2008, showing the information that compared with past, eBay’s management was less efficient in the recent two years.
Table 6 balance sheet from 1999 to 2008
(Morning Star, 2009e)
This sheet shows that generally the rate of cash growth was a little slower than that of intangibles’ growth in the past decades; hence, the conclusion can be made that eBay had a weak ability to adapt to the fast-changing market, especially between 2003 and 2004. But the continuing zero inventory reveals that from 2005 to 2007 eBay could adapt the market better and it did well in payment, improving the structure of assets to some extent. The long-term debt was continuing zero after 2005, together with the high total equity, reflecting that eBay was in had a steady capital structure and was of high independence, too.
Table 7 cash flow from 1999 to 2008
(Morning Star, 2009f)
It is clear that aside from the year 2006, cash from the investing was minus in the rest years. That is to say, eBay reduced our investment in that year.
Table 8 detailed annual cash flow from 2005 to 2008
(eBay Inc. financials, 2009)
In the past three years, the figures of cash flows from investing were minus. 89.00 to 268.00 ($ million) while the ratio in 2007 was 157.00 to 50.00 ($ million). The ratio of the total cash from operating activities to the net income was keeping more than 1, illustrating that the company failed to improve its core ability and might involve in developing other business. However, compared with Amazon, eBay’s enormous free cash flow generation, strong cash hoard and healthy balance sheet keep it in the catbird position even it started other business.
6.0 Non-financial analysis
6.1 Amazon’s business model
It is widely known that there are two Business models of Amazon.com, its retail (first party) and seller business (third party). This has rendered Amazon flexible to swift its major marketing directions according to different time and market situation, thereby keeping its unit margin economics at a high level. Aside from the flexibility and super power in sales, the two models have successfully helped Amazon to expand its business network in ecommerce arena.
The zero-inventory logistics have long been implemented in Amazon.com. In its warehouse, only several kinds of recently most popular books can be found. In most cases, staff in Amazon.com purchase books from publishers after receiving customers’ orders. Customers pay their books by credit cards while Amazon.com conducts the payment to the publishers 46 days after books sale. This module not only guarantees its affluent capital and steady finance circumstance, but also reduces the cost of massive storage. Amazon.com utilizes Third-Party Logistics to deal with delivery. Usually it takes customers one to two weeks to receive their goods and the professional logistical companies are able to ensure the efficiency. Third-Party Logistics module enables Amazon.com to spend more time on technology which supports the running of the whole companies. In addition, in the upper trend of the supply chain, Amazon.com prefers wholesalers to publishers since it usually takes weeks to wait for publishers’ orders arriving while the wholesalers tend to delivery a book within one to five days at a lower cost when they possess this book in their stock. All these measures contribute to its just-in-time delivery and the minimal inventory.
6.2 Amazon’s marketing
In its early stages, Amazon.com acted not only as a book seller, but also providing a range of services, such as detailed information of books, book reviews and recommendation from both customers and media, and important links to related websites and data. What is more, Amazon Kindle, a soft ware and hardware displaying e-books and digital documents developed by Amazon.com, was firstly released in America in 2007 and now it has developed its market in other countries ,such as Australia (Holahan, 2007). Later, its updated technology enabled Kindle books to be displayed on iPhone and iPod Touch, which was an excellent method to popularize Kindle and take more market shares by catching plenty of Kindle users. Up to now, Kindle has evolved into the fourth generation known as Kindle DX which is designed for pc, which paves the way for the Kindle Store’s revenue.
6.3 Amazon’s Store operations
Amazon.com’s huge physical devices are centralized in Seattle, Washington. Based on the convenient location close to the largest book distribution warehouse in the world, sufficient high-tech talent pool and reasonable tax policies, Bezos, CEO of the Amazon.com chose Seattle as the headquarter. It focuses on software development rather that hardware. It is worth mentioning that Amazon’s web page limits the number of graphic content in order to facilitate user’s quick opening the webpage fully, which helped Amazon.com win the “Best Web sites of 1996” entitled by Time magazine (Ghemwat, Brown and Baird, 2004).
6.4 eBay’s business model
EBay is a typically online auction company which supplies its service and products by the format of webpage. Under this model, eBay can enjoy no time and geographical constraints, highly loyal customer groups who have been addictive to the bidding progress and a great number of sellers. Meanwhile, eBay are capable of capturing consumer’s surplus by means of auctions.
6.5 eBay’s Marketing
EBay possess powerful business lines such as StubHub, Kijiji, Shopping.com, Half.com, ProStores, and Rent.com, which guarantees its sufficient items listed on line. Except that, the newly-emerged strategy in eBay is to sell Skype and in November eBay announced its success in completion of the deal of $ 2.75 billion, which they promised previously (Wauters, 2009). Suffering from the financial crisis and the fierce competition from other auction companies, eBay began to use fixed price to sell items to adapt to market and mitigate its terrible situation.
6.6 Comparison Amazon.com with eBay
In the beginning of 2008, the financial revenue of eBay decreased while Amazon.com gained 18% up in its sales, which aroused the public’s attention to the two companies’ situation (Mark, 2008). Compared with eBay which uses bid module to attract customers, Amazon.com tends to supply service and products related to individuals’ daily use; hence the amounts of business are different between them.
There are some distinctions in their marketing strategies. Customers can find in Amazon.com’s WebPages, the key words always tend to be “economical’, “new arrival” and “recommended by other customers”, which indicates that items here are cheap, fashionable and of highly recommended by others, thereby grasping customers’ interest by highlighting the unique characteristics of items. In eBay, however, you will mostly find luxuries like extremely expensive cars and villas, which beyond common people’s needs and has limited customers. Hence, the former are capable of creating high sales record while the latter fail to fulfill that.
When it comes to the after service, Amazon possesses more advantages than eBay. To some extent, Amazon itself is the seller party so that it is comparatively easy for it to tackle the problems after sale. However, eBay is a platform on which the buyer and seller negotiate with each other without face to face communication. Therefore, eBay fails to guarantee all items service listed on its websites. Thus definitely affect the reputations of each company and in turn influence the sales.
7.0 Potentials of both companies
7.1Companies’ potential
Apparently, the business potential of the Amazon Kindle DX is formidable due to its human design, convenience, PC and other instruments(such as iPhone) availability. The potential customers of Kindle are not only restricted in office staff, but also evident in college students, who need documents of many subjects but are unwilling to carry brick-like books. What is more, Amazon’s recent measures to cut down the price of Kindle in the market will enable budget-conscious students to be able to their customers (Rao, 2009).
EBay’s decision to sale Skype is hard to be judged and the future is uncertain. On the one hand, eBay can focus more on core strategies and strengths without Skype. But on the other hand, Skype is potential to offer strong growth in its revenue. Hence, keeping Skype cannot be considered a mistake for eBay, since eBay does not need the cash currently and Skype may be the turning point of its little decline.
7.2 Investor potential
In April 2009, Bezos, the CEO of Amazon.com, wrote a letter to shareholders to express that the company’s goals not changed (James, 2009). Its primary financial goal is to pursue maximum free cash in a long run and comparatively higher return from investment. He also stressed that among all the investments, they will give priority to Amazon Web Service, tools for third party sellers, digital media, China’s market and new product categories, which will definitely be the meaningful investments and bring promising return to all investors.
PayPal is considered to play a pivotal role in eBay’s growth nowadays since online shopping has becoming the sweeping trend in today’s word and it continues to proliferate and expand worldwide, which will bring PayPal limitless needs and potentials. Looking through the growing history, eBay certainly possesses the financial resources to exploit this opportunity and excite its long-term investors.
7.3 Employee potential
In the early years of Amazon.com’s founding, top managers’ back group were nearly computer-related, which encouraged the company to emphasis on its technology and generate diverse products relevant to digital area, such as Kindle (Kirby and Stewart, 2007). Hence, the whole organization has a strong power in R&D development according to its abundant computer science background. Besides, employees there have the priority of stock option so that key employees tend to be bound with Amazon.com’s development, which forces them to concentrate on their business and future trend.
When eBay conducted Skype business, it made a decision to pursue employee stock option exchange program in March 2009, allowing some employees to trade underwater options for restricted stock units and even Skype employees to participant in this program (Cavery, 2009). Therefore, the management structure of eBay may face change and the new power will be brought in to enhance the company’s performance.
8.0 Limitations of the analysis
The limitations exist in two primary aspects. Firstly, it is hard to get access to detailed information about both companies’ detailed financial statements, and data on particular sales (such as eBay’s Skype business), which makes it is complicated to analyze the situation and trends. Besides, my superficial understanding and limited knowledge about financial analysis, especially about stock market, makes me cannot capture the essence of some data from their financial statements and fail to discover the truth relying behind their non-financial performances. Therefore, it is hard to give a perfect objective judgment and predication about both companies’ performance.
9.0 Conclusion
To conclude, both Amazon.com and eBay are fast growing companies whose business has reached into many countries worldwide, but at different rate in recent years. But compared with Amazon.com, eBay performed less as well as Amazon according to its financial statement, especially that in 2007. Amazon.com is a sound investment for long-term investors seeking growth of capital, in terms of its steady rise in financial statement and super performance on new products development. However, although eBay’s future growth tends to not be as fast as its past, it will remain its above-average growing ability by expanding its business and changing its module, together with its affluent cash flow.
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