Is Alibaba Group Holding Ltd (BABA) Stock Really Comparable to Amazon?

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If you’re even remotely paying attention to Wall Street, you’ve heard of China’s e-commerce giant Alibaba Group Holding Limited (NYSE:BABA). BABA stock has garnered quite a bit of media attention since making its way onto the scene in 2014 and now analysts have started to compare the firm to its American counterpart Amazon.com, Inc. (NASDAQ:AMZN).

Is Alibaba Group Holding Ltd (BABA) Stock Really Comparable to Amazon?

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Any stock that has been deemed “the next Amazon” deserves a second look, especially considering that AMZN has delivered returns of more than 2,000% to investors that bought into the stock 10 years ago.

However, while AMZN and Alibaba are both e-commerce giants, it’s important to consider whether the similarities end there.

BABA’s International Growth

Perhaps the biggest determinant of whether BABA stock can live up to its comparison with AMZN is whether Alibaba will be able to move beyond China. At the moment the Chinese e-commerce market is BABA’s bread and butter and the firm has done very little to break out of that bubble.

The problem with being reliant solely on Chinese customers is that Alibaba is limited in terms of future growth potential and the firm would also suffer alongside a slide in the Chinese economy.

That’s not to say that BABA hasn’t already taken steps to expand its business internationally — the firm’s affiliate Ant Financial recently bought Moneygram International Inc (NASDAQ:MGI), which could eventually develop into Alibaba’s own worldwide payments business.

However, the Ant and Moneygram tie-up are still a big what-if for BABA stock. Right now, Alibaba has very little international exposure, without which the firm will never live up to AMZN.

Alibaba Stock and Cloud Computing

Much like its American counterpart, BABA is building out a cloud computing business that is worth considering. Alibaba’s cloud computing arm is in the very early stages, generating just $765 million in sales. BABA’s cloud efforts have eaten into the firm’s profitability, with the business losing more than $90 million last year. However, all of these figures aren’t necessarily a bad thing.

Alibaba was, by all accounts, a late entrant into the cloud computing space. That means that the company is having to spend significantly in order to gain market share. That explains the lack of profitability and should provide investors with some comfort about the business’ inability to turn a profit. BABA’s cloud computing business has also put up some pretty impressive growth metrics over the last few quarters as well — the firm gained 114,000 new customers and saw revenue growth of 115% in the December quarter.

The picture that Alibaba’s financials paint of its cloud computing business looks very similar to Amazon Web Services five years ago, when it had just begun. It’s important to consider the fact that BABA is starting its cloud business much later than Amazon did, but as the industry is still relatively new, that factor shouldn’t hold BABA back.

There are definitely a lot of similarities between BABA and Amazon, especially if you believe in Alibaba’s efforts to expand internationally and the firm’s blossoming cloud computing arm. However, while they both oversee a massive e-commerce business, AMZN offers an impressive distribution and logistics network that BABA can’t hold a candle to.

Also, Amazon’s business model differs significantly from that of Alibaba. Amazon’s business is a mix of direct sales and commission for its retail partners’ sales. Alibaba, on the other hand, acts as a middleman for both small and large retailers.

The firm doesn’t charge a commission, but instead sellers can pay to improve their ranking on BABA’s search engine, so you could make the argument that Alibaba’s business model is more similar to that of Alphabet Inc’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google.

Alibaba Stock: A Different Kind of Risk

It’s also important to note that even if the two were identical businesses, the fact that BABA is based in China and conducts most of its business there is a significant difference. As fellow InvestorPlace contributor Josh Enomoto noted — cultural differences should be considered when you’re comparing the two.

Gambling is much more widely accepted in Asian cultures, which could be part of the reason that the firm’s share price has had such a roller-coaster ride since its IPO. Investors who are picking BABA as the next Amazon should be aware that even if the stock does deliver the same explosive growth that AMZN has, they may not see the same financial results as BABA stock has the potential to trade much more erratically.

Alibaba stock does bear a striking resemblance to Amazon, especially in AMZN’s early days. However, it’s not worth buying BABA stock for that reason alone, because it is likely to behave much differently than AMZN did. With that being said, Alibaba stock isn’t a bad growth play when you consider its potential expansion in the payments and cloud computing space.

As of this writing, Laura Hoy was long AMZN.

Marie Brodbeck has a Finance degree from Duquesne University and has been a financial journalist for more than a decade. Her work can be seen in a variety of publications including InvestorPlace, Benzinga, Yahoo Finance and CCN.


Article printed from InvestorPlace Media, https://investorplace.com/2017/03/alibaba-group-holding-ltd-baba-comparable-amazon/.

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