- Alibaba had sky-high expectations during its IPO but has since failed to meet them.
- Bearish sentiment around Alibaba is based on the Chinese economy, which could bounce back strongly.
- Amazon presents a great argument for a long option.
Nicknamed "The Amazon of the East," one cannot help drawing comparisons between Alibaba (NYSE:BABA) and Amazon (NASDAQ:AMZN). They are both hungry in the sense that they are constantly trying to venture into new markets and establish themselves. Despite the fact that Amazon has a market cap which is ~$95 billion higher than Alibaba's, the latter is putting in place plans to have a bigger presence in the Western market. Interestingly, Alibaba built its business solely in China, and currently controls 80% of the e-commerce market share there. In comparison, Amazon controls approximately 30% market share in the U.S.
Consequently, when Alibaba had its IPO, it went down as the biggest in history partly due to China's fast-growing economy and the view that Alibaba was like investing in several companies at once. However, Alibaba stock is currently trading at ~29% below its IPO debut.
On the other hand, Amazon continues to dominate new markets. In fact, they recently announced an interest in the growing Indian market. Amazon stock has been on a general decline in the past few months, and this is partly due to growing unease, among investors, about a lack of profits.
Alibaba's dominance of the Chinese market is both a blessing and a curse. When China's economy was fast-growing and had sky-high expectations, Alibaba enjoyed growth. However, China's growth has slowed and the ruling government is putting measures in place to prop up the economy.
Alibaba still maintains an impressive ecosystem, spread out across many interests. For instance, Aliexpress is becoming increasingly popular in the Western world due to low prices. However, Aliexpress has failed to really become a household name due to the proliferation of counterfeit goods on the site. As a result, one isn't always sure of what you are getting. Notably, Westerners typically have more disposable income and want the real deal at a relatively lower price. Therefore, if Alibaba 'cleans up' Aliexpress, and combines it with a marketing push, there is a huge opportunity to increase sales from the West.
Alibaba also owns Taobao which can be summarized as China's answer to eBay. Relating back to my previous point, Alibaba literally controls e-commerce in China. Understandably, as China's growth slows, consumers are a bit wary about their spending. Despite this, Alibaba still beat analysts' estimates on revenue growth.
A mark of a good company is an insatiable appetite for growth opportunities. Despite Alibaba's success in a highly competitive market, it seems that they are set to 'attack' the Western market over the next 5 years. After increasing their stake in Groupon to 5.6%, Alibaba is looking at ways to bring some of their services to the Western world. It won't be far-fetched for them to take over Groupon and other similarly sized tech companies.
Due to the bearish sentiment towards China, -and hence Alibaba- the Alibaba stock price has dropped by ~18% over the past 3 months. This is despite the fact that Alibaba enjoyed a YoY revenue growth of 26.4% in Q3 of 2015. When combined with the fact that the company is trading at a PE ratio of 17.2, Alibaba stock presents immense value. For comparison purposes, the industry average stands at ~42.
Personally, I think that Alibaba's share price of $66.90 presents a great opportunity to buy low and capitalize once the cloud of bearish sentiment surrounding China lifts.
Drawing a parallel with Alibaba, Amazon is the king of e-commerce in the Western world. With 300M+ registered Amazon customers, $107 bn in sales during 2015, and YoY revenue growth of 20% over the past 9 years, it is no wonder that Amazon stock is one of the most-loved tech stocks.
Never too afraid to venture into untapped markets, and even create new product categories- i.e. Kindle, the tech giant seems to never put a foot wrong. Amazon has maintained a fairly consistent rate of growth due to their constant reinvestments of profits. Therefore, Amazon share holders tend to have a more long-term outlook. The hope is that Amazon continues to grow at a rapid pace, consolidates, and begins to show significant profit on their income statement.
Notably, Amazon owns the most visited retail site in the United States. Jeff Bezos and his team have done an admirable job of using the Amazon homepage to drive sales of their self-branded goods. As a result, they have been able to dominate the e-reader market, and have recently launched a clothing range.
Amazon Prime Air presents a unique opportunity to welcome the robotics future. This would allow Amazon to deliver fresh goods quickly and conveniently. Due to the fact that the drones can fly in a variety of weather conditions, and aren't subject to traffic restrictions, Amazon would be able to increase sales while reducing costs.
Also, Amazon has its eyes set on the growing Asian market. Just as India goes through a surge with regard to the economy, Amazon has increased its interest in the region. Notably, internet access in the country isn't widespread; however, this is set to improve significantly in the near future.
In a move aimed at reducing costs, Amazon launched "Amazon Flex". This is a delivery service in a similar vein to Uber. Drivers can sign up to pick and deliver goods to Amazon's customers. Consequently, Amazon is able to crowd source their delivery efforts, and scale quickly.
Amazon has also strategically launched the Amazon Echo, which is like a trojan horse into the home. Interestingly, Amazon users can order products using their voice and play content from Amazon Prime, among other ecosystem specific features.
Amazon is set to grow over the next five years due to having a range of investments which are bound to make significant returns within that time. On the other hand, Alibaba's big revenue driver would have to be a bigger foray into the European and American markets. Their grip on the Chinese market is almost as tight as it could possibly be.
The bearish sentiment on Alibaba is unfounded; and leaves smart investors with an opportunity to buy while the stock price is relatively low.
Finally, if you had to put the house on it, I would go with Amazon rather than Alibaba. Amazon has proven time-and-time again that they know how to strategize, implement and dominate. On the other hand, Alibaba can sometimes have a bit of a 'scattergun' approach with regard to their investments.