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Better Buy Now: eBay vs. Groupon

Online commerce is a promising industry offering exciting opportunities for growth over the long term. Both eBay (NASDAQ: EBAY) and Groupon (NASDAQ: GRPN) are launching multiple initiatives to accelerate performance, and this could drive considerable gains for investors going forward. Which one is a better purchase right now: eBay or Groupon?

Solid profitability and modest growth from eBay

eBay is working on different areas to attract more customers to its platform and accelerate revenue growth. Such as building alliances with popular brands in apparel and improving shopping experience with better product catalogs. The company is also focusing on more precise product descriptions to try and increase traffic from search engines.

As well as these initiatives eBay is expanding into intriguing niches. The company recently launched eBay Wine which is a new platform for wine enthusiasts offering a wide variety of products, along with buying tips and guides from industry experts that make the wine shopping experience more accessible.

Image source: eBay.

The company registered a 4% increase in revenue during the first quarter of 2015, reaching $2.14 billion. In currency-adjusted terms, revenue grew 6% year over year, and management is forecasting a similar increase in the range of 3% to 5% in constant currency sales during the full year 2016. While the business is not doing too badly, eBay could certainly perform better, considering that online commerce is a remarkably dynamic growth industry.

On the other hand, the business model is spectacularly profitable. eBay reported an operating margin of 28.7% of revenue last quarter, while adjusted operating margin, which excludes stock-based compensation and other non-cash expenses, amounted to a staggering 33.4%. 

eBay stock trades at a fairly attractive valuation. The price-to-earnings (PE) ratio is in the area of 14.4, a significant discount versus a PE ratio of about 33 for the industry average and around 19 for companies in the S&P 500 index. 

Groupon is in the midst of a transformation

Groupon is going through a restructuring. The company has recently exited some international markets in order to better focus on its North American business, and management plans to move away from low-margin product categories in shopping. The main idea is streamlining and simplifying operations in order to drive superior profitability in the long term, even if this takes a toll on financial performance over the coming quarters.

Groupon wants to move away from its "daily deals" business model to become a global marketplace centered on local merchants. Management intends to attract users to the platform to search for opportunities on a regular basis, versus the old approach of sending daily deals via email. This new strategy sounds well intended, but implementation can be quite challenging, and results will probably take considerable time.

Image source: Groupon.

Transformations are seldom easy, and this is being reflected on the company's financial performance. Gross billings amounted to $1.47 billion in the first quarter of 2016, a decline of 5% in U.S. dollars and a 3% decrease in constant currency terms. Revenue during the quarter was $732 million, a 2% decline versus the first quarter in 2015. 

Management is expecting sales for the full year 2016 to be in the range of $2.75 billion to $3.05 billion, a decline versus $3.12 billion in 2015. Adding to the concerns, Groupon lost money at the operating level last quarter.

Groupon's financials are quite grim, and there is little reason to expect a material improvement over the coming months.

eBay or Groupon?

Both eBay and Groupon trade at attractive valuations, but Groupon is much cheaper due to all the uncertainty currently surrounding the company. Looking at the price-to-sales ratio, eBay is in the area of 3.1 times revenue over the last year, while Groupon trades at a considerably lower 0.63. If Groupon manages to effectively jump-start sales and improve profitability, then the stock offers a lot of upside potential from currently depressed levels.

However, that's a big "if". Groupon is struggling to consolidate a viable business model and regain relevancy among consumers, so investing in the company is quite a risky proposition right now.

eBay needs accelerated growth in order to better capitalize on its potential in e-commerce, but sales are moving in the right direction, the business model is remarkably profitable, and the stock price is attractive. All things considered, eBay looks like a much sounder investment than Groupon.

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