Alibaba (BABA - Free Report) initially made a name for itself in the US as the go-to place to buy cheap knock-offs of NBA jerseys and designer shoes. Alibaba is now the principal e-commerce retailer in China on a scale with Amazon (AMZN - Free Report) , dominating 58% of the total e-commerce market in China, according to eMarketer. With a total addressable market (TAM) coming close $5 trillion, which makes up China’s overall retail industry. BABA captured 636 million annual customers in 2018, up a whole 23% from the previous year. This company is growing at an exponential rate and is striving to continue until their TAM is reached.
Alibaba vs. Amazon
Alibaba is often considered the Amazon of China; they both control the e-commerce space in their geographic regions and are both quickly becoming the largest corporations in the world. Despite their seemingly identical product/service proposition, these companies have very different approaches. The biggest difference is the way in which they sell their online products.
Amazon sells most of its products to customers directly through its extensive warehouse network where the goods are housed. Alibaba, on the other hand, acts like a middleman between merchants and consumers. Amazon makes most of its money from product margins while Alibaba’s collects revenue through something called a merchant fee which places sellers’ products higher up on Alibaba's search lists.
Amazon posted 2018 revenue of $232 billion, more than 4 times the $53 billion in revenue that BABA achieved in 2018. The fascinating part is that AMZN and BABA had bottom-lines that were less than $1 billion apart, $10.1 billion and $9.2 billion respectively. Giving Amazon a 4.3% net margin and Alibaba a 17% net margin. This enormous margin difference for comparable businesses would be a red flag under most circumstances but what you need to consider are the costs associated with of the different business models as well as the geographical location that these companies operate. Alibaba operated a business with much less overhead than Amazon considering that their main functions is just connect buyers and sellers, they don’t need the extensive warehouse network along with the storage costs of carrying as much inventory as Amazon does. The cost of operating a business in China is much less than operating one in the US considering that the cost of living is substantially lower. Amazon also makes it their priority to provide the consumer with the lowest prices so a lot of their economies-to-scale are being passed along to the consumer. These factors aside, seeing Alibaba’s margins being 4x that of Amazon is quite an attractive figure especially considering it’s trading at much cheaper multiples.
Alibaba has seen 44% annualized top-line growth over the past 5 years while Amazon only saw 27% annualized growth over the same period. 86% of Alibaba’s revenue is being driven by its core e-commerce business with other revenue streams like cloud computing and subscription entertainment services are growing; e-commerce is still what this firm primarily relies on. Amazon’s revenue streams are a little more diversified, only 71% of revenue is from online sales, brick-and-mortar operations making up a growing 7% of sales (driven by their Whole Foods acquisition), web services (AWS) make up 11% of their income and the fasted growing segment is AMZN’s advertising revenues. The diversification of Amazon’s revenue drivers makes it a safer bet than a less diverse Alibaba, though BABA is growing its noncore businesses at an expanding rate. Below is a 2-year return chart comparing BABA (blue) and AMZN (red) performance.
Amazon’s continuing success story in the United States has been an inspiration for small businesses across the world. From Jeff Bezo’s garage to being in the top 5 biggest tech companies in the world. People love the company and the stock, and this is likely part of the reason AMZN is trading at 68x forward earnings. This P/E might have been a reasonable valuation if the company had just turned a profit but they have been profitable for 5 years. It’s P/E-growth (PEG) ratio is 1.95 which is a much more reasonable valuation considering the industry average is 1.79. The growth priced in to Amazon is colossal, with EPS growth expected to be 32.37% and 49.52% for 2019 and 2020 respectively. There is too much uncertainty with these priced-in growth numbers for my liking. At this moment I wouldn’t be comfortable jumping into a tech company with a 1.63 beta and a 68x P/E in such uncertain economic conditions. I would wait for a dip before putting on a position. Watch for earnings on the 25th of this month for more clues into the future of this firm. If they can continue to grow margins I would feel more comfortable going long in AMZN. $1,600 has been my price point to consider buying since the end of last year and I stick by that. AMZN – Zacks Rank #2 (Buy).
Alibaba is trading at much more competitive multiples, with a price of 36x forward earnings and a P/E-to-growth (PEG) ratio of 1.29. This firm doesn’t have nearly as much EPS growth priced into the stock because of economic instability brought by both the trade war and poor economic numbers coming out of China. The beta for this stock exceeds 2, which is a small red flag when economic stability is questionable, but I see a larger upside to BABA especially considering the unprecedented 332% top-line growth in the last 5 years. I also understand their growing revenue diversity as a huge opportunity for this business to take market share in different categories that they don’t already dominate. I would look to buy this stock sub $170 with a price target north of $200. BABA – Zacks Rank #3 (Hold).
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