Alibaba and Amazon are the two largest e-commerce and cloud infrastructure companies in the world.
Alibaba has China’s largest online shopping platform, and Alibaba Cloud is also China’s leading cloud platform. Amazon is the e-commerce leader in the United States, Europe and other markets, and has the world’s largest cloud platform AWS (Amazon Web Services).
Alibaba went public six years ago, and its stock price has risen nearly 300% from its IPO price. But Amazon’s stock soared more than 830% during the same period. Let us see why Amazon attracts more funds than Ali, and whether the trend will continue.
The difference between Amazon and Alibaba
Most of Amazon’s revenue comes from its online shopping platform, which includes its own products and products from third-party sellers, but the company gets most of its profits from AWS.
AWS’ higher-margin revenue enables Amazon to expand its e-commerce business through a low-margin strategy, which includes discounts, free shipping options, cheap hardware, and crypto subsidies for Prime subscribers. It also supports the continued expansion of the company’s physical stores.
Alibaba also receives most of its revenue from its online shopping platform, and it does not assume any inventory. The group owns China’s top websites, Taobao and Tmall, which are paid online platforms and connect buyers with sellers. Cainiao fulfills these orders in its logistics department.
This less capital-intensive method keeps Alibaba’s core e-commerce business profitable. However, its other three businesses-Alibaba Cloud, the crypto media and entertainment division, and the innovative business division-were not profitable. Therefore, Alibaba uses the profits of its core e-commerce divisions to subsidize the business growth of these unprofitable segments.
Amazon is burning up all cylinders
Last year Amazon’s revenue and profit increased by 20% and 14% respectively. But in the first nine months of 2020, Amazon’s revenue has increased by 35% year-on-year, and its earnings have soared by 68%.
This acceleration is attributed to the COVID-19 crisis, which has greatly increased its online sales and use of AWS cloud services. Its Prime ecosystem has more than 150 million users at the end of 2019, and it may continue to expand during the pandemic.
In the first nine months of this year, AWS revenue increased by 30% to $32.6 billion, accounting for 13% of Amazon’s overall revenue. The operating profit of the cloud business jumped 51% to reach US$10 billion, accounting for 62% of operating profit, and the operating profit margin increased from 26.3% to 30.5% year-on-year.
These figures show that AWS has not lost to Azure, which is the biggest cloud competitor Microsoft (NASDAQ: MSFT). This also shows that AWS profits will continue to support the growth of Amazon’s online shopping business.
In the first nine months of this year, the operating profit margin of Amazon’s North American business has declined year-on-year. The main reason is that COVID-19 has made epidemic prevention and implementation costs higher, but its international business has finally achieved weak operating profits after years of operating losses.
Analysts predict that Amazon’s revenue and profit this year will grow by 35% and 52% respectively. Next year, they expect that as the epidemic passes, their revenue and profit will increase by 18% and 30%, respectively.
Alibaba faces growth worries
In the 2020 fiscal year ending on March 31 this year, Alibaba’s revenue increased by 35%, and its adjusted profit increased by 38% (excluding the acquisition of 33% of its fintech subsidiary Ant Group and other one-time gains and losses).
In the first half of fiscal 2021, Alibaba’s revenue increased by 32% year-on-year, and its adjusted profit increased by 28%. Unlike Amazon, Alibaba has not caused a huge increase in sales due to the epidemic for two reasons.
First of all, Ali faces more online competitors in China, including JD.com and Pinduoduo, than Amazon faces in other top markets. Secondly, China basically contained the epidemic in April, which limited the overall impact on online sales.
Alibaba also relies more on the low-margin parts of core e-commerce, including physical stores, cross-border markets and Cainiao logistics, to promote the growth of this business. However, the strategy will reduce the adjusted EBITA profit margin of the core business sector (ie e-commerce) in the first half of this year from 40% to 37% year-on-year, and this erosion may continue—and the final impact depends on Almost the group can support the unprofitable cloud business, media and innovative business capabilities.
Analysts expect that as Alibaba’s growth in the second half of the year improves, this year’s revenue and earnings will increase by 47% and 36%, respectively. Next year, its revenue and profit are expected to grow by 31% and 21%, respectively.
However, the recent failure of Ant Group to go public could have greatly stimulated Alibaba’s profits. At the same time, the group and other Chinese technology giants may be strengthened due to the new antitrust rules, and relevant predictions may derail.
Valuation and conclusion
Amazon’s current stock price reflects a forecasted price-to-earnings ratio of 58 times, while Alibaba’s forecasted price-to-earnings ratio is only 28 times lower.
Investors are willing to pay a premium for Amazon’s stock because Amazon’s e-commerce and cloud businesses have been growing like weeds throughout the pandemic. At the same time, due to the failure of Ant Group’s listing plan and new regulatory threats from China and the United States, Alibaba’s valuation seems to be suppressed.
I personally own Amazon but not Alibaba, but I think that based on Alibaba’s long-term growth potential and valuation, it is now a better buying option. Alibaba’s stock will remain volatile in the future, but it is still China’s largest e-commerce and cloud company, and its valuation is too cheap for profit growth.