Amazon (AMZN) and Alibaba (BABA) are market giants. Each dominates in their respective market territory, and they operate in the same eCommerce industry space. But which is bigger? And from an investment perspective, which stock represents the best value?
How Is Alibaba Different To Amazon?
Both Amazon and Alibaba were created during the 1990s, with Amazon getting the first mover advantage in 1995, and Alibaba arriving later in 1999.
In the subsequent years, both went on to devour the eCommerce market, Amazon gaining a foothold in the US and European market, Alibaba in Asia.
On the face of it, both Amazon and Alibaba perform the same service. They are Internet-based marketplaces where vendors and sellers can connect with potential customers.
There are subtle differences in exactly how each does this, and in where they focus their resources and efforts the most. Amazon sells products directly to customers, whereas Alibaba, through its Taobao platform, is more like eBay (EBAY) where buyers deal directly with sellers.
The two companies have also branched out into other sectors, with Amazon developing an electrical goods wing selling products such as its Alexa device, and Alibaba moving into the financial services industry with the creation of its payment processing arm Alipay.
That said, both firms are considered direct rivals in an industry in which they are the only two players.
Amazon vs Alibaba: How Do The Compare?
You might be forgiven for thinking that due to the similarities between Amazon and Alibaba, and the fact that they’ve been trading for more-or-less the equivalent amount of time, that their current market capitalizations might have diverged to around about the same value. And yet they haven’t.
When it comes to sheer size, Amazon is vastly larger than Alibaba. Amazon’s market-cap of $1.5 Trillion dwarfs Alibaba’s $640+ Billion, and when you calculate each firm’s revenue numbers, the disparity is even greater: Amazon had revenues of $126B from its last quarter, whereas Alibaba had $34B.
But this doesn’t tell the entire story.
For example, Alibaba’s estimated Forward Price-to-Earnings ratio is far more favorable at 22x for the fiscal year, compared to Amazon’s equivalent period of 65x.
Why Is Alibaba So Cheap Compared to Amazon?
Considering that their market-caps differ only by a multiple of 2.4x, and their respective stock prices by 12x, this makes Alibaba cheaper than Amazon. But why?
Part of the answer might lie in Amazon’s growth strategy. Looking at its financial report for Q1 2020, the company directors stated that they intended to re-invest all $4B of the operating profit from that quarter into assuaging the problems and challenges of the COVID-19 pandemic, and in ensuring that its customers and employees safe.
That is quite a bold commitment, one not readily seen in many other companies. This points to a willingness – a real willingness – to play the long-game, something that investors reward with faith and loyalty, and something that is ultimately reflected in its share price.
Furthermore, Amazon is increasingly becoming a diversified business, and a successful one at that. Again, this is something likely to inflate the share price beyond what the raw data might suggest it is worth.
Take, for example, its Amazon Web Services (AWS) division. Its success in this endeavour has been astounding. Through 2017 to the present day, AWS has seen unyielding linear growth with almost triple sales figures in that time, outperforming a major competitor, Oracle, in the same period.
Amazon’s business model might also be seen as more robust compared to Alibaba’s. Amazon derives a sizeable chunk of its revenue from subscription sales, a feature that investors feel guarantees a safer income, whereas Alibaba has yet to finesse this aspect of its own model.
Amazon is also generating revenue at a more rapid rate than its physical-store competitors in the US, leaving behind the likes of Walmart (WMT), Costco (COST) and Target (TGT) in the same space. Once again, this inspires confidence from investors which manifests in strong share price.
Can Alibaba Surpass Amazon?
Despite the success of Amazon, there are still plenty of positive indicators that suggest Alibaba will continue to thrive in Asia – and even make a push into the so-far untapped foreign markets it needs to take a share of to continue growing.
It’s worth noting that back in 2012, when Amazon first began its ascent to the heights it has achieved today, its share price was sitting pretty much at exactly where Alibaba’s is right now. Could Alibaba make that same ascent?
Tailwinds for Alibaba bound from multiple sources. The recent growth trends that the Chinese markets have enjoyed is projected to continue, with China expected to break into the top one-third of nations based on per capita income by 2025.
And Alibaba’s business is in good health. The company has increased revenues over the last five years by 330%, and it has, like Amazon, been heavily re-investing its resource into expanding and growing its enterprise.
It has even taken on $24B more in liabilities to fuel this growth, while at the same time prudently covering this risk by growing its assets.
Will Alibaba Overtake Amazon?
It’s too early to predict the outcome of the Amazon vs Alibaba race just yet, but both companies are geared up for the battle.
A lot will depend on how each business develops its current core capabilities, and also how aggressively they seek expansion into other sectors.
Will Alibaba gain from having fewer overheads when it eventually moves into the American market, or will Amazon’s diversified portfolio of interests trump Alibaba on its own turf when it stakes its flag in the Asian market? Only time will tell, but Alibaba still has a lot of growing to do, and it’s far too early to rule them out just yet.
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.