Amazon ebay comparison presentation with simple regression analysis
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9. Z multiples Ebay Individual T Values Amazon individual T Values Lehman individual T Values (2006 data) T1 = Working Capital / Total Assets 1.2 0.298 0.648 -0.048 T2 = Retained Earnings / Total Assets 1.4 0.462 0.070 0.030 T3 = Earnings Before Interest and Taxes / Total Assets 3.3 0.093 0.075 0.008 T4 = Market Value of Equity / Total Liabilities 0.6 5.884 8.301 0.051 T5 = Sales/ Total Assets 0.999 0.416 1.820 0.079 Z Score Bankruptcy Model: Z = 1.2T1 + 1.4T2 + 3.3T3 + 0.6T4 + .999T5: 5.257 7.922 0.120
10. ( $ in millions) 2010 2009 2010 2009 Income before tax: $2,098 $2,879 Income before tax: $1,497 $1161 Add backs: Add backs: Legal Settlement: --- $343 Legal Settlement: --- $51 Foreign Translations: --- $80 Subtractions: Subtractions: Gain on Skype Note: $(23) --- Foreign Translations: $(179) --- Recognition of Revenue Gain on Sale of Skype: --- $(1,499) due to Accounting Change: $(508) --- Core Income: $2075 $1723 Core Income: $810 $1292
11. Net Revenues Cost of Revenues Gross Profit Operating Expense EBIT Interest Inc (Exp) Tax Expense Net Income Net Sales Cost of Sales Gross Profit Operating Expense EBIT Non Op Inc (Exp) Tax Expense Net Income 2011 2010 %∆ $42,755 $34,204 25% $32,404 $26,561 22% $10,351 $7,643 35% $8,420 $6,237 35% $1,931 $1,406 37% $100 $91 10% $(477) $(352) 36% $1,554 $1,152 35% 2011 2010 % Δ $10,428 $9,156 14% $3,077 $2,564 20% $7,351 $6,592 12% $5,208 $4,538 15% $2,143 $2,054 4% $108 $45 140% $(349) $(298) 17% $1,902 $1,801 6% ($ in millions)
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Editor's Notes
Unique Visitors data link: http://www.comscore.com/Press_Events/Press_Releases/2011/8/Amazon_Sites_Visited_by_1_in_5_Global_Internet_Users_in_June
Ebay: One way that EBAY manages risk of currency fluctuations is through the use of cash flow hedges. These hedges are designed to “offset potential changes in cash flows attributed to a change in USD/foreign exchange rate fluctuations.” These gains or losses from cash flow hedge can be found in AOCI. Ebay's second method of risk mitigation would be the provisions set aside to cover expected losses from transactions and bad debt. The dollar amount set aside is based off of historical delinquency rates, credit quality, and economic & regulation conditions. Last method of risk mitigation would be Ebay's focus on improvement of their users' experience by streamlining the search experience and changing their fee policies to focus on actual closing of a transaction.
The three performance indicators we have selected are based on three overlapping areas that would affect their individual business. The reason why we selected inventory and GMV as their respective activity indicator is because the dollar amount reflected in these figures are a rough representation of the amount of activity/transaction taking place online. ROCE was chosen because we are taking the perspective of the shareholders to determine the amount of investments being generated against their earnings. We selected Operating Cash Flow to Current Liabilities as a measure of liquidity. This gives as a view of how much of their short term liabilities that they can cover from cash flows from operations. Lastly we selected the Z score to give relevance of our liquidity ratio based on a worst case scenario of a bankruptcy. The lower the score, the more relevant is the liquidity ratio.
Due to the exponential relationship between our activity indicators and their respective gross profit, we had to take the natural log of GMV and Inventory in order to express the relationship over time in a linear fashion. By doing so, we are also able to run a regression with the transformed data.
The first pair of regressions only relate the activity indicators to GP in dollar amounts. The problem with these two regressions is that we’re regressing GP on activity indicators even though they don’t have a linear relationship. The second pair of regression relates the activity indicators to GP in percentage terms. By doing so, we’re taking the transformed data shown in the earlier slide (which went from exponential [nonlinear] to linear). The results should express a clearer picture of the relationship between activity indicators and GP. Both instances have a positive effect on GP and as such, we can conclude from the data that they do affect profitability.
*The core income only reflects the transitory items we chose for the market value. Thus, our number is overstated.
This pair of regressions relates the natural log of GP over the past 10 years. By doing so, we can see the average growth of each company on a per annum basis (on average). Even though, Ebay beats Amazon in terms of average growth per year by 1%, we’re really comparing two companies of different size. Amazon is nearly twice the size of Ebay in terms of market cap.
