Amazon.com (AMZN) and Alibaba (BABA) are e-commerce leaders of the U.S. and Chinese markets, respectively, and both are involved in business activities outside their core markets.
With $500 billion in combined market capitalizations, it is possible that you already own AMZN or BABA. But do you own the right one? Given that most investors like to diversify their portfolios, and that owning two e-commerce giants might be a little too risky, chances are that investors prefer one or the other.
While Amazon stock has clearly outperformed BABA over the last year, the most important detail is which stock is likely to perform best moving forward.
Here’s a look at how AMZN and BABA stack up against each other.
BABA vs. Amazon: Growth and Valuation
As previously said, both AMZN and BABA are involved in businesses outside of e-commerce in their core market. However, the collective performance of those business activities is reflected in analyst expectations. Amazon is expected to grow revenues 20% this year and another 20% in 2016. Meanwhile, BABA is expected to grow revenues by 28% this year and 30% next.
The big reason for BABA’s increased growth is the performance of China’s e-commerce market and also how BABA creates its revenue versus the likes of AMZN.
According to eMarketer’s latest forecast, e-commerce sales in China will grow 32% this year followed by 27% and 22% growth in the two years thereafter. In comparison, U.S. e-commerce sales are expected to grow 14.2% in 2015, 13% in 2016, and 12.2% in 2017. By 2018, China will represent $1 trillion of e-commerce — more than double the U.S. total.
This industry-wide growth is one reason that BABA is expected to grow faster than AMZN, but Alibaba also creates revenue from marketing & advertising, not the actual sale of goods. Much like Facebook (FB), the opportunity for higher ad prices exist and are in play for BABA as a future opportunity.
Investors figure that Alibaba will get serious about monetization once e-commerce growth starts to decelerate in China. For now, BABA’s goal is to create as much market share as possible.
But is the price right?
In terms of valuation, the comparison isn’t even close. Amazon stock trades for 115 times next year’s expected earnings, while BABA goes for a mere 3.7 times forward earnings. Over the past 12 months, Alibaba has free cash flow of $8.1 billion whereas Amazon has $5.4 billion in the same period. This means that BABA stock trades at 26 times FCF. AMZN stock trades at 57 times FCF.
A Clear Winner
No matter how you slice the data, BABA is cheaper and growing much faster right now. Because of its ability to increase monetization rates, not to mention the ongoing growth of e-commerce in China, chances are that Alibaba will continue to outgrow Amazon for many years to come.
So, with much faster growth, a cheaper price tag, and an investment portfolio worth billions that is capable of driving long-term growth beyond e-commerce, there is little doubt that BABA is the superior investment from this point forward.
As of this writing, Brian Nichols was long Alibaba.
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