Amazon, EBay Fail To Inspire, Says Nomura

Nomura Equity Research’s Brian Nowack today initiated coverage of Amazon.com (AMZN) and eBay (EBAY), slapping a Neutral rating on both stocks, writing that costs will continue to put pressure on Amazon’s profit margin, and eBay is a dubious “turnaround story.”

Nowack is modeling $49.03 billion in revenue and $1.43 per share in profit this year for Amazon, higher than consensus. But for 2012, he’s modeling $66.7 billion in revenue, ahead of the consensus $64.8 billion, but just $1.48 in profit versus the consensus $2.06 per share.

That’s evidence of his belief Amazon will continue to spend heavily, will will take a toll on cash flow, too:

Ironically, we think AMZN, the paradigm of e-commerce, will need to continue investing heavily in bricks & mortar and grow its fulfillment sq. footage from 39mn currently to ~90mn by 2016 in order to capitalize on the revenue opportunity. This will restrain CSOI margins at ~2-3% for the next few years, which is significantly below consensus. We do not see the nearterm potential for reaching double-digit margins or prior-peak profitability. The Business Is Becoming More Capital Intensive Capital spending has risen from 2% of revenues historically to 4% this year, and we believe this elevated level will persist for the next few years as the company continues to invest in its bricks, flicks and clicks businesses. This will pressure cash flow and keep near-term cash flow conversion well below historical 100%+ levels.

Nowack thinks $220 is about fair value for the stock.

eBay, on the other hand, is moving further from its traditional auction business, competing more in new, fixed priced goods, writes Nowack. That puts it into more direct competition with Amazon, he thinks, and that could be a problem:

We fail to see how eBay�s online outlet mall is differentiated and will lead to sustainable incremental Marketplaces growth. It also remains unclear how eBay will monetize many of its emerging technology investments. Through it all, we expect eBay to continue to lose share within overall N. American e-commerce.

For this year, Nowack estimates $11.6 billion in revenue and $2.02 a share in profit for eBay. That’s about in line with the Street. For next year, he’s modeling $13.7 billion and $2.34 per share, again, in line.

Amazon shares today are up $6.19, or 3%, at $216.93, while eBay shares are up 99 cents, or 3%, at $31.74.