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As eBay Stumbles, Amazon Looks Strong

A weak forecast from online auctioneer eBay could spell trouble for retail rival Amazon.com when it reports earnings next week, even though analysts still peg Amazon as the holiday season's big winner.

EBay (NASDAQ: EBAY) gave a first-quarter earnings forecast on Wednesday that fell far short of Wall Street expectations, raising concerns that the recession was hitting Internet commerce more deeply than previously thought.

Amazon (NASDAQ: AMZN) was the favorite online contender going into the holidays due to its popularity and ability to offer aggressive discounts. Analysts also point to deteriorating market share at eBay versus expected gains at Amazon, due to announce fourth quarter results on January 29.

"It's becoming increasingly clear that there is one huge winner in terms of e-commerce even in this environment ... and that's Amazon," said Stifel Nicolaus analyst Scott Devitt.

But given that Amazon's holiday outlook came out in October, before the full impact of the recession on consumer spending, the company could yet disappoint Wall Street estimates on revenue and margins, analysts said.

Amazon boasted of its "best ever" holiday season last month but gave no financial details regarding the sales, such as how its margins fared with the discounts seen across the retail sector.

"I think there's very reasonable risk that numbers come in a little light and their guidance is more muted than people think," said Citigroup analyst Mark Mahaney. "We are in the teeth of the worst consumer recession in our collective lifetimes."

Investors were sobered earlier this month when discounter Wal-Mart Stores (NYSE: WMT) cut its profit forecast for the holiday quarter, proving it was not immune to the recession despite being widely considered a rare retail success story.

"Amazon's stock isn't as defended against a Wal-Mart-like outcome as eBay's stock was," Mahaney said. While expectations for eBay were already muted, Amazon shares trading at about $50 and 34 times fiscal 2009 projected earnings are still "pretty high."

"We think the valuation is pretty fair, but there's more likelihood of numbers coming down," he said. "It may not be pretty."

Shares of online auctioneer eBay fell 12 percent to $11.67 on the Nasdaq on Thursday due to its disappointing forecast. Amazon closed 1.2 percent lower at $49.94.

Rising traffic

Online retailers as a whole felt the pain of the recession, with total Web holiday sales down 3 percent last year, according to tracking firm comScore Inc (NASDAQ: SCOR).

EBay beats Amazon in the total number of U.S. unique visitors. But traffic to Amazon rose 9.6 percent in December 2008 from a year earlier and fell 2.5 percent at eBay, according to the tracking firm.

EBay has also been grappling with company-specific issues that have only been exacerbated by the recession.

Structural challenges in the way eBay does business in its main marketplaces unit -- which generates the bulk of profits -- is keeping eBay back, analysts say, a claim echoed by many sellers, who cite too-high listing fees and time-consuming steps to list and buy products.

Improvements at eBay have taken longer to kick in, and such measures as more fixed-price goods on offer, higher security and rejiggered listing fees, might be too little, too late.

Some investors are waiting for eBay to spin off one of its successful units: Web payments service PayPal or Internet-based telephone company Skype. The time it's taking to revive growth in marketplaces has revived calls on Wall Street for such a move, although EBay says it has no plans to do so.

That potential is one reason that some investors still see value in eBay shares, combined with its low valuation, trading at 8 times fiscal 2009 expected earnings.

Luring in buyers

At the same time, Amazon has managed to expand its selection of goods, luring in a greater number of buyers in search of low prices and third-party sellers who post wares on the site.

And while eBay has striven to preserve margins, Amazon has actively chased growth through lowered prices and tech spending.

That strategy has paid off, argued Devitt, acknowledging that the market tends to reward companies for maximizing profits, not sales.

"As an investor you have to be incredibly patient," he acknowledged. "The good thing for Amazon is that some of that patience is paying off now."