Better Buy: Alibaba Vs. Amazon Stock (BABA) (AMZN)

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In this article, I will compare the growth prospects, risks, and valuations of the two largest e-commerce companies in the world: Alibaba (NYSE:BABA) and Amazon (AMZN). Shares of both e-commerce companies have underperformed this year, in large part due to a post-pandemic slowdown in global economic growth and rising inflation affecting consumer spending. Both of these factors have created significant uncertainties in the e-commerce industry. With shares of Alibaba and Amazon down 31% and 29% year to date, respectively, both companies have pros and cons. While Amazon has a few advantages, I believe Alibaba might be a better deal!

Sales growth is slowing

Both Alibaba and Amazon saw their sales growth slow significantly in the most recent quarter as post-pandemic inflation headwinds and weaker economic growth impacted their businesses. Alibaba’s revenue growth slowed to 0% (Alibaba’s China commerce business even fell 1% in Q1 2023), the worst performance on record for Alibaba, while Amazon’s revenue growth slowed to just 7% in Q2’22 % slowed year-on-year, marking a 20-year low for Amazon.

BABA vs. AMZN revenue growth in the quarter


The near-term prospects for revenue growth are currently stronger for Amazon than Alibaba, primarily because Amazon indicated in its second quarter earnings summary that it posted 22 net revenues of between 125.0 and 130.0 billion in Q3 revenue growth rate of 13.0 billion -17% YoY. Alibaba didn’t provide guidance for either the next quarter or the full year due to uncertainty about e-commerce sales in a country still under sweeping COVID-19 lockdowns.

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In terms of annual forecasts, Amazon is expected to outperform Alibaba. Consensus forecasts call for Amazon to post 11% revenue growth this year and 15% next year … while Alibaba is expected to grow its revenue by 2% and 13%, respectively. Estimates for Alibaba are also down more, suggesting the market is a bit more bearish on BABA than AMZN…

AMZN vs. BABA sales estimates


A key component driving Amazon’s stronger revenue growth is AWS — Amazon Web Services — which is rapidly accelerating revenue growth due to strong customer adoption of cloud solutions. Amazon Web Services generated $19.7 billion in revenue for the company in the second quarter alone, up 33% year over year. The revenue share within Amazon was around 16% and I see that growing to over 20% within the next 2-3 years. The cloud business is by far Amazon’s most promising business segment, driving the company’s overall revenue growth. Unlike e-commerce, AWS is also highly profitable, generating $5.7 billion in operating income (29% margin), while Amazon’s e-commerce operations in North America and internationally continued to lose money in Q2’22.

Amazon: AWS Sales/Operating Income Growth

Amazon: AWS Sales/Operating Income Growth

On the other hand, Alibaba’s cloud business generated $17.7 billion ($2.6 billion) in revenue last quarter, representing a 10% year-over-year growth rate. Cloud revenue accounted for just 9% of Alibaba’s total revenue, while commerce (China and International) dominated with a 76% revenue share.

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So not only is Amazon’s cloud business responsible for most of Amazon’s revenue growth, but AWS is also growing more than three times faster than Alibaba’s cloud segment. In addition, Amazon has a significant advantage in terms of market share in the cloud market, with AWS being #1 and capturing a third of the global cloud market. Alibaba came in a fairly distant fourth place with a 5% market share.



Evaluation: There are significant differences

Amazon and Alibaba have both been highly valued during the pandemic because online retailers had super-attractive growth prospects at a time when physical competition was all but shut down by health officials. However, the normalization of post-pandemic e-commerce growth and the resulting re-evaluation of Amazon and Alibaba have changed things somewhat.

Amazon and Alibaba are both profitable and are expected to remain profitable. However, one key difference has emerged in relation to company valuations. While Amazon is still expensive relative to its earnings potential (52X PE ratio), Alibaba is trading at a bottom of 10X…presenting stronger potential for an upside re-rating.

AMZN PE Ratio Forward 1 year, EPS Estimates


Risks at Alibaba and Amazon

Both companies are facing a worsening outlook in their core e-commerce business due to high inflation affecting consumer spending. Amazon and Alibaba are both heavily dependent on consumer spending, and both companies continue to be dominated by their e-commerce operations (Alibaba’s commerce share is 76%, while Amazon’s is 84%).

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In addition to the top-line risks shared by both companies, there are other company-specific risks that are of concern: Amazon generates a large volume of sales outside the US, meaning the retailer is exposed to a soaring US dollar. A strong US dollar hurts currency conversion, which is a headwind for Amazon.

Alibaba faces regulatory and delisting risks that affect the pricing of its shares. I believe that a delisting of Alibaba’s ADR from a US exchange is highly unlikely as the company has obtained primary listing status in Hong Kong for its shares, giving US investors an alternative marketplace to buy shares. Due to its primary listing status, Alibaba’s shares are also available to Mainland China investors through the Hong Kong Stock Connect program.

Final Thoughts

There are many factors to consider when comparing Alibaba and Amazon. Both companies are apparently going through a post-pandemic adjustment period with slowed growth. Both companies are investing in the cloud market and face challenges in their core segments.

Amazon has a stronger near-term revenue outlook than Alibaba, as it forecast 13-17% revenue growth in Q3, while Alibaba could actually see negative revenue growth in Q2’23. Estimate trends also speak for Amazon. However, from a valuation perspective, I believe Alibaba wins the comparison because the Chinese company trades at a fraction of Amazon’s P/E. So the risk profile of Alibaba stock is significantly more upside than Amazon’s!

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