AMZN Stock: Amazon.com, Inc. Set To Take Significant Market Share From Alibaba (BABA)

  • Amazon set to gain traction from China's growing middle class.
  • Key investments ready to make big returns.
  • Strong performance in India within a short period.

Amazon's (NSDQ:AMZN) foray into China isn’t yet a significant threat to Alibaba's (NYSE:BABA) core commerce business; however, performance in India and global momentum indicates that Amazon is set to grab significant market share in the Chinese market.

Notably, Amazon is getting into a Chinese B2C market with 70% of the market shared between just two companies: Alibaba and JD.com (NSDQ:JD). Moreover, Alibaba has a deep understanding of the Chinese market. For instance, during 2015’s “Singles Day”, China’s version of Black Friday , the Chinese commerce giant was able to generate $14 billion in revenue. This is not to say that Alibaba’s dominance is impenetrable.

When we consider the fact that China’s middle class is growing at a stratospheric rate, and consumers are willing to spend, Amazon doesn’t have to go toe-to-toe with Alibaba in order to see significant results. Amazon gave the market a sense of their aggressive foray by offering Chinese consumers a year of Prime for $28. This might come across as desperate but is based on a lesson learnt. U.S based Prime members spend double per year on average as compared to non-Prime members. Therefore, Amazon is keen to use Prime as leverage to gain significant traction in the highly competitive Chinese market.

In an early indication of their strategy, Amazon took the decision to give Chinese Prime members free overseas shopping. Chinese consumers are keen to purchase products from countries such as the U.K and U.S.A. In fact, the middle class goes to the length of going on trips in order to buy western goods. This creates a sort of “funnel” to bring highly sought after products into China. In this way, Amazon is able to create a niche for themselves in China and grow off the back of this momentum.

There is more evidence that Amazon is looking to gain a firm footing in China. For instance, the development of Amazon Prime Air and the upcoming launch of their shipping fleet would allow the company to make huge cost savings and gain full control of logistics. This would allow Amazon to become a truly global company and enable investors to reap the benefits.

A longstanding criticism of Jeff Bezos and his team is their constant reinvestment of profits, and lack of dividends. However, the strong year-on-year growth for Amazon over the past five years shows that this was a smart strategy. Impressively, AWS grew by 55% between Q3 2015 and Q3 2016. Interestingly, growth opportunities in the current commerce market lie in the software based execution. For instance, machine learning, predictive analysis and automation (chat bots) are making a game-changing difference. This has the potential to provide Amazon with a long term growth in Alibaba dominated areas. (Also Read : Why The VMware Deal Is Great For AWS And AMZN Stock )

In a move that would have been unthinkable 10 years prior, Amazon overtook Walmart to become the largest  U.S retailer (by market cap). This was only possible due to a risk on strategy and a strong appetite for innovation. We only need to look at Amazon’s performance in India to get an indication of what they could do in Asia. After landing in India just 3 years ago, the company recently emerged as India’s most attractive brand. Moreover, India is Amazon’s fastest growing market. When one considers the socio-economic and logistical challenges present in India, this is quite impressive.

On the other hand, Amazon’s Q3 earnings report left some investors worried; however, analysis of  trends in global markets and you will see that Amazon is well positioned. For instance, Amazon’s timing of investment into India and China is impeccable. The two countries are growing fast and are likely to become formidable superpowers in the near future. Moreover, the internet access is improving rapidly in these areas.

Amazon’s Prime Air drones combined with the increasing use of digital currencies in emerging markets such as Africa could also add significant revenue in the future. This is due to the fact that roads in many countries in Africa are subpar, and Amazon Prime Air drones allow for the circumvention of the logistical challenges. (Also Read : Why I Would Buy AMZN Stock Post Q3 Earnings )

Conclusion

In conclusion, Amazon stock still holds tremendous value and is an interesting proposition for any long investor. This is based on strong historical performance, stable management and calculated, profitable risks.

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  • I do not have any business relationship with the companies mentioned in this post.
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