The fortunes of Apple and Alibaba could not have been more different over the past few years. Where Apple has gone from strength to strength with its share pricing rising by 222% over the past 5 years, Alibaba has had a horrendous decline, falling by 46% in the same time period.
What may seem most surprising about those numbers is the revenue growth each company posted. Apple posted annual revenue gains of 15.9%, -2.0%, 5.5%, 33.3%, and 7.8% over the past 5 years while Alibaba grew by 50.6%, 35.3%, 40.7%, 18.9%, and 1.8%.
How did Alibaba grow so much faster yet underperform to such a large extent relative to Apple. More importantly, looking to the future, which is the better bet between Alibaba vs Apple stock?
The Alibaba Story Is No Fairytale
Savvy investors might surmise that while Alibaba’s top line is much more impressive than Apple’s, perhaps its bottom line reveals red flags.
Upon closer scrutiny, though, we find the exact opposite to be the case. Alibaba’s operating income is stunning. On $126 billion of revenues in fiscal year 2023, it generated $12.6 billion of operating income.
By comparison, Apple generated $119 billion of EBIT (operating income) on $394 billion of revenues. So, yes, Apple is operationally more efficient than Alibaba, turning every $1 of revenues into 30% of EBIT. But Alibaba is by no means doing a poor job of converting each $1 into $0.10 of EBIT, particularly when that number is $12.6 billion.
So what’s the cause of the Alibaba’s underperformance?
Famously, Peter Lynch stated that a company with a poor balance sheet will struggle over the long haul, but again that doesn’t seem to be the issue at Alibaba, which has as much cash as it does debt ($28 billion), as well as $48 billion haul of short-term investments.
One primary reason is that the Chinese Communist Party enacted regulations that targeted monopolistic practices among technology firms, and Alibaba sat directly in its crosshairs. Famously, Alibaba’s Ant Group IPO was pulled from the market.
Fears among investors of regulatory overreach have sparked sustained waves of selling in Alibaba stock over the past few years, but what now?
Is Alibaba Stock a Buy?
The odds are slim that the CCP will restrict foreign owners from holding stakes in Chinese companies as some have feared.
If we put that concern to the side for a moment, and examine the company’s cash flows they are truly impressive and reveal a company that is seriously undervalued.
By our estimates, Alibaba has fair value of $142 per share, suggesting 61.9% upside according to a discounted cash flow forecast analysis.
That price target aligns with analysts’ estimates, which have a consensus of $140 per share.
On a valuation basis, Alibaba is absolutely a Buy at this point in time.
Where investors need to be very careful about buying Alibaba, however, is if tensions between the US and China escalate.
Elon Musk synopsized the risk well by noting that Chinese policy explicitly states its intent to bring Taiwan under its government. Trade war escalations, in his view, are evidence of both countries positioning themselves for a potential conflict.
In Musk’s view, the question is not whether China will attempt to bring Taiwan into its fold but whether the two governments can resolve the matter diplomatically. That’s a gambit any Alibaba investor must factor in before taking the plunge.
To make matters worse for prospective buyers, Alibaba does not have much of a seasonal track record of rising until the summer period, when it tends to outperform. From September through to the end of May the share price has historically been quite choppy.
Should You Invest in Apple Stock?
Apple recently launched its iPhone 15 and, as with past years, the share price dipped after the event.
By contrast with Alibaba, Apple tends to be strong through most of the year but September is historically a weak month for it.
Perhaps it’s simply a case of buy the rumor and sell the news following its annual conference that sits in early September. Whatever the reason, Apple is a stock that most investors should have some exposure to, whether its through a broad-based index ETF, as part of owning Berkshire Hathaway, or a technology fund, or simply on its own.
Famously, it’s been stated that Apple is a stock to own, not trade. It simply has too much going for it to bet against. The company’s financials are stunning, whether on the profit and loss statement, the balance sheet, or the cash flow statement. Few companies can or will ever come close to replicating Apple’s success.
For investors who haven’t taken a look at Apple in a while, a surprise lurks within its 10Q and annual reports.
The company doesn’t just make all of its money from iPhones as in the old days, but rather it earns a truckload from Services too, as well as its other product lines, such as iPad and Macs.
Alibaba vs Apple Stock: The Bottom Line
To cut to the chase, if you had to pick between Apple vs Alibaba stock, the Cupertino-headquartered US giant comes up trumps because of its better operating margins, pristine financial statements, and future growth opportunities.
Yes, Alibaba is a better value on paper compared to Apple but regulatory risks from the Chinese government coupled with potential trade war escalations that could blossom into a full military conflict are sufficient causes for concern to keep conservative investors at bay.
In short, if you had to pick between Alibaba and Apple, owning stocks in the iPhone manufacturer will let you sleep better at night, and the odds are Apple isn’t going to stop building its massive piles of cash any time soon.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.