When investors think of a company that’s leveraging its strong online presence to cultivate an offline presence, Amazon.com, Inc. (NASDAQ:AMZN). And well it should. What used to be nothing more than an e-commerce outfit is now doing everything from groceries to cloud services to a brick-and-mortar bookstore, and more. Consumers love it.
And yet, when one takes a step back and takes an unbiased assessment of e-tailers that are increasingly making omnichannel work for them, Alibaba Group Holding Ltd (NYSE:BABA) deserves a look.
Indeed, given the company’s fiscal metrics, BABA stock is arguably the better, more potent pick of the two names.
BABA Stock Has a Little Bit of Everything
While most investors broadly recognize Alibaba has been getting into several online and offline businesses, most investors — perhaps even most owners of BABA stock — likely don’t realize just how deep it has waded into untraditional waters.
Since early 2015, Alibaba has partially or wholly acquired smartphone maker Meizu, online movie-ticket agent Yueke, online video venue Youku Tudou, food delivery name Ele.me, media company SCMP Group, ride-hailing company Didi Chuxing, lottery service provider AGTech Holdings, Android app store Wandoujia, grocer Redmart and most recently, its Ant Financial subsidiary announced its plans to acquire fintech outfit MoneyGram.
Alibaba stock is NOT just an e-commerce name anymore.
Perhaps more important, whatever it is in China, like Amazon.com in the western world, it doesn’t face any significant competition in its primarily Asian market. One could argue JD.Com Inc (ADR) (NASDAQ:JD) is a threat, but JD remains persistently unprofitable, and simply can’t muscle its way to more market share the way Alibaba can. One way or another, one of those new hot spots looks like it’s going to be the United States.
It raises the question though … is Alibaba equipped to take on Amazon at the same time it has got so many other balls in the air?
Actually, yeah, it is.
Alibaba Is Self-Funded and Well-Funded
There’s no denying CEO Jack Ma has been uncomfortably aggressive at times in spreading the company’s footprint. It has paid off though, as the company’s business of e-commerce is not only offsetting the losses incurred by all of its other ancillary businesses, but it’s keeping the company surprisingly more profitable than Amazon is.
The specifics: Over the course of the past twelve months, Alibaba has produced profit margins of 26.7%, while Amazon has cleared a little less than 2% of revenue as net earnings for the same timeframe. In numeric terms, Alibaba has banked $5.6 billion worth of net income over the past four quarters, versus Amazon’s $2.1 billion.
And that’s more or less been the norm for a while.
Yes, there is more to the story. There always is. One can’t simply explain away that kind of profitability disparity though.
Analysts are becoming believers too, particularly following last quarter’s revenue growth of 54% and the company’s earnings beat. Alibaba earned $1.30 per share, versus estimates of only $1.13 per share of BABA stock. Goldman Sachs analysts recently wrote:
“We raise our Fiscal year 2017-2019 revenue estimates by 3-4% on better growth outlook for China online advertising and International retail, and raise our earnings per share estimates by 5-7% due to higher operating leverage. Our 12-month sum-of-the-parts-based target price increases 2% to $131 after incorporating forecast changes and mark to market of listed investments. At $101, core retail is valued at 13x estimated fiscal 2019 earnings. Reiterate conviction-list Buy rating. Key risks: slower GMV [gross merchandise value] growth, lower monetization, more intense competition.”
Goldman’s take effectively echoes most pros’ opinions right now. Even analysts that aren’t quite as optimistic about the company’s expansion into non-e-commerce waters don’t dislike Alibaba. Cantor Fitzgerald’s Youssef Squali recently noted:
“Ambitious foray into ‘New Retail’ could pressure margins in core retail. While Alibaba’s ownership of Intime, a leading department store operator, broadens its opportunity in retail through omni-channel commerce, we note that the move carries execution risks and is likely to erode margins in core retail.”
Squali was so worried that he upped his price target on Alibaba stock from $115 to $120,
Bottom Line for BABA Stock
It might be hyperbole to say Alibaba has out-Amazoned Amazon, though it would be more than fair to say BABA stock has done a better job than AMZN in terms of cost-containment.
Regardless, as difficult as further penetrating the North American market may prove to Jack Ma, Alibaba may end up doing more with its brick-and-mortar businesses in China than Amazon does with its physical presences here in the United States.
How so? As much as Americans love and live for their smartphones, Chinese smartphone owners use them more, and use them for more things central to the offline living of life. Alibaba’s other ventures all contribute to the idea that, like Amazon, it’s morphing from an e-commerce powerhouse to a lifestyle company.
More important, the plan is working. If there was any doubt BABA stock is the real deal, it’s being wiped away, while Amazon’s paper-thin margins and debt are increasingly getting in its way.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.