Chinese e-commerce giant Alibaba Group Holding Ltd (NYSE:BABA) and its American counterpart Amazon.com, Inc. (NASDAQ:AMZN) have three of the same top growth engines: the cloud, e-commerce and India. Yet one is a better stock to buy than the other.
Yes, Alibaba is much more profitable than Amazon, and Alibaba stock trades at a much cheaper valuation than AMZN. Moreover, BABA also has a few very powerful positive catalysts that Amazon doesn’t have.
Given Alibaba’s strong growth engines, high profitability and relatively low valuation, investors should run to buy BABA stock.
Similar Top Growth Engines
Like Amazon, BABA has a very fast-growing cloud business. In the fourth quarter, the company’s revenue from cloud computing jumped 115% versus the same period a year earlier, marking the seventh consecutive quarter that the unit has grown by triple-digit percentage levels.
However, the unit’s Ebitda margin was -5% last quarter, and according to TechCrunch, its annual revenue rate “has surpassed the $1 billion run rate mark.” That’s way behind the run rate of over $14 billion and the $3.53 billion income achieved by Amazon Web Services.
But at the rate that Alibaba’s cloud unit is growing, it will get a lot closer to Amazon’s level in a couple of years. Moreover, Synergy Research Group says that the market share of Alibaba’s cloud unit in its large home market of China has reached 40% and is increasing, TechCrunch reported
E-commerce should also be as huge a growth engine for Alibaba stock as it is for Amazon. In August 2016, research firm eMarketer predicted that China’s e-commerce market would jump to $2.416 trillion in 2020, up from $899 billion in 2016. In 2016, China was poised to account for 47% of global digital retail sales, the firm stated.
The booming economy of India, where AMZN and BABA are facing off, is a potential growth engine for both e-commerce giants. Alibaba has obtained a controlling stake in Paytm, an Indian company that recently launched an e-commerce platform after attracting 200 million users to its mobile wallet offering there, according to The Wall Street Journal. India has a population of more than 1.2 billion, “but only has about 40 million online shoppers,” WSJ quoted Credit Suisse as saying.
So both companies have three of the same major growth engines, but Alibaba’s profitability and the valuation of BABA stock is much more attractive than that of AMZN. In its quarter ended in December, Alibaba’s net income came in at $2.5 billion, while Amazon’s net income was only $749 million.
Alibaba’s Other Growth Engines
Finally, Alibaba has a number of very powerful growth engines that AMZN lacks. Alibaba’s mobile payment wallet, Alipay, “is the most ubiquitous form of electronic payment in China,” according to a Forbes columnist. BABA also owns Youku Tudou, which is known as China’s version of YouTube and had a 21% share of the Chinese online video market as of last October. Furthermore, BABA has a majority stake in a movie production unit, Alibaba Pictures Group.
In 2016, the latter unit obtained a stake in Steven Spielberg’s company, Amblin Entertainment, which has produced the movie, A Dog’s Purpose, which was number one in China as of March 14, according to Deadline. With China’s economy still growing rapidly, Alipay, Alibaba Pictures and Youku Tudou all obviously have tremendous potential.
Considering the relatively low valuation of Alibaba stock and the company’s tremendous growth engines, BABA shares are a great buy at current levels and should prove quite profitable for patient investors.
As of this writing, Larry Ramer did not hold a position in any of the aforementioned securities.
