Both Amazon.com Inc. stock and Alibaba Group Holding Ltd. stock have had a strong year. But, which is a better buy today?
Amazon.com, Inc. (NASDAQ:AMZN) founder Jeff Bezos was, for a very brief period of time, the richest man in the world. His ascendancy on the rich list has been fuelled by the rise of the e-commerce-to-cloud giant, in which Bezos still owns a 16.6% stake. Amazon stock is up by 29.1% this year, outperforming the broader markets. While Amazon has had a strong 2017, Chinese competitor Alibaba Group Holding Ltd. (NYSE:BABA) has had an even better year. The stock is up by over 91% this year and is challenging Amazon for the crown of the world's most valued e-commerce company. So which of the two is a better buy? Amazon stock or Alibaba stock?
Amazon Stock vs Alibaba Stock: Fundamental Analysis
Amazon, as well as Alibaba, have reported strong top line/revenue growth over the last several years. Amazon revenue has grown from $48 billion in FY 2011 to $135.99 billion in FY 2016. In comparison, Alibaba has seen its revenue grow from $3.14 billion in FY 2012 (March 2012 ending) to $22.99 billion in FY 2017. In percentage terms, Amazon has seen its revenue grow at a compounded average growth rate of 23.16% over the period while Alibaba revenue has grown at 48.9% over the same time frame.
Investors should note that while Amazon records part revenue as a merchant (recognizing the entire product value as a sale) and part revenue as a marketplace (commission basis), Alibaba records all its e-commerce revenue on a marketplace basis (as ad commissions). Hence, it is easy to misled into believing that Amazon operates at a significantly larger scale than its Chinese counterpart. While Amazon does not declare GMV (Gross Merchandise value) numbers, it is speculated that Alibaba is the operator with a greater scale.
Given the lack of a comparable metric at the revenue level, investors can look at the bottom line/profits to evaluate the two companies. It is here that Alibaba comes out as the clear winner. Amazon reported Net Income of $631 million in FY 2011 compared to $632 million reported by Alibaba for the comparable period. Looking at the most recent fiscals, the divergence in the profitability trends becomes pretty clear. While Alibaba closed its last fiscal (FY2017) with Net Income of $6.34 billion, Amazon Net Income climbed to $2.37 billion in its last reported fiscal.
Alibaba has also outperformed Amazon in the recent quarters. For comparison, while Alibaba reported a 53% YoY growth in its latest quarter, Amazon revenue grew at a more modest 24.8%, on a year-over-year basis. The strong performance of Alibaba can be attributed to some macro trends, the Chinese economy in general and the growing Chinese middle-income class, in particular.
Alibaba Stock Riding Strong Macro Tailwinds
A number of questions have been raised with respect to the growth of the Chinese economy. While observers, as well as data, might have been divided on the subject of the 'economic growth of China' there is no smoke without a fire. In other words, China's economic growth story isn't exactly as strong as it was a few years ago. And well, while it does seem contradictory, a slowing economic growth might not be all that bad for Alibaba. In fact, as Nick Wells of CNBC had written a while ago, "While the Chinese economy has shown signs of fatigue, Alibaba has seen growth in consumption. Those things aren't necessarily contradictory when considered from a seller's perspective. With constricted consumption through traditional avenues, retailers are turning to Alibaba's platform of sites to reach a larger consumer base, both within China and without." Based on this theory, a slowing Chinese economy could, in fact, be a tailwind of sorts for Alibaba. Recent revenue/earnings growth numbers do point to greater momentum for the Chinese behemoth.
Alibaba is also turning its attention to the massive opportunity in the offline retail market in China, which could be worth $4.25 trillion. A rapidly growing middle class, as well as favorable tailwinds in the Chinese e-commerce market, will continue to fuel Alibaba's growth. Quoting from a recent post, "China is expected to be a middle-income economy by 2030. While 40% of the population was in the low-income bracket last year, the number is expected to drop to 11% in 2030." Not surprisingly, some investors even consider Alibaba stock a play on the growth of the Chinese middle class.
Alibaba Stock Price Hasn't Reflected The Growth In Fundamentals
While it isn't hard to prove that Alibaba has outpaced Amazon in recent times, Mr. market hasn't really rewarded Alibaba stock holders. Following its IPO in 2014, Alibaba stock price is up by 79%, significantly underperforming Amazon stock, which has risen by 192.2% in the same timeframe.
To sum up, Alibaba stock looks to have the stronger fundamentals of the two rivals. In addition to the stronger fundamentals, exposure to positive macro tailwinds and failure of the stock to reflect the fundamental growth over the last few years make Alibaba stock an attractive buy. While Amazon stock is not necessarily a bad buy, Alibaba stock appears to be the better long play right now.
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