Chinese e-commerce giant Alibaba Group Holding Ltd (NYSE:BABA) made history in September 2014 thanks to its blockbuster IPO, the biggest of its kind ever, that helped give the company a market cap of $231 billion from the get-go. But for a while, that was as good at it got for BABA stock holders.
If you held Alibaba shares from the time of its IPO to January 2016, you would have had nothing at all to show for your troubles compared to an impressive 87% gain by Amazon shares over the same period. Amazon.com, Inc. (NASDAQ:AMZN) is widely considered the closest comparison for Alibaba, though the two companies are quite different as you shall see shortly.
The turning point for BABA stock came during the raging bull move of the past two years. Alibaba has doubled since January 2016 vs. a 65% gain for Amazon. While both stocks have continued to put forth stellar performance in 2017, BABA has outpaced AMZN stock with year-to-date gains of 62% vs. 33.5%.
So what’s fueling the prodigious runs to all-time highs? More importantly, can we now safely say that BABA is just as good, if not better, for your portfolio than AMZN?
It’s hardly surprising that BABA lagged so much during its first 15 months as a public company. After all, Alibaba was mired in damning allegations about its marketplace carrying counterfeit products, fears of government cronyism, as well as an overhang of questionable accounting practices.
Investors also argued that the Chinese titan lacked the kind of global appeal that Amazon is famous for and that its business model would be easy to copy outside China.
It’s not like Alibaba lacked some virtues though. For starters the company is led by Jack Ma, a charismatic and clever entrepreneur. It accounts for a whopping 80% of China’s online sales; owns highly profitable PayPal Holdings Inc (NASDAQ:PYPL)-like and YouTube-like businesses, and boasts humongous operating margins: 57% vs. 1% by Amazon. Never mind the fact that BABA was growing its top line nearly three times faster than Amazon.
Investors refuse to cut Alibaba any slack though everything has worked out in its favor: Alibaba shares have continued trading at much cheaper valuations than Amazon by almost any conceivable metric. In a market dominated with frothy valuations, BABA is a bargain compared to rivals.
BABA stock sports a trailing 12-month price-to-earnings ratio of 55.2 vs. 184.7 for AMZN; a price-to-book ratio of 22.17 vs. 10.43, and a price-to-free cash flow of 50.1 vs. 44.
The only metric where Alibaba fares worse than Amazon is price-to-sales, where it gets pipped 22.4 vs. 3.4. That sizable difference though can be chalked up to the fact that the two companies operate different revenue models, with Alibaba merely being a third-party platform which connects buyers to sellers while charging a commission whereas Amazon is a predominantly first-party sales platform where the company sells merchandise directly to customers.
Alibaba has continued growing at an impressive clip since the IPO. The company sports a compounded annual growth rate (CAGR) of 48.9% vs. 27.9% by Amazon over the time frame. And, the future promises to be even better for BABA. It recently forecast monster revenue growth of 45%-49% for the current fiscal year, putting the company on track for the biggest underlying rise so far. And it reported top line growth of 59.8% for the April quarter, the best in its history.
A big reason why Alibaba has been growing like a weed is because it’s focused on emerging markets in Asia and the developing economies whereas Amazon is stronger in mature markets such as the U.S. and Europe. Alibaba has 500 million users but is targeting 2 billion over the next 10 years.
BABA CEO Jack Ma in this video says the key difference between the two companies is that Amazon is more like an empire where it seeks to control everything whereas BABA is more of an ecosystem where it strives to build partnerships. This could be the reason Jack Ma promised Trump that Alibaba would create 1 million American jobs over the next five years.
Bottom Line on BABA Stock
Buy stock of both companies. Alibaba’s strategy seems to be paying off as is clearly evidenced by its accelerating growth. That also means that the brand is quickly gaining recognition around the world. Alibaba’s cloud recently made it to Gartner’s Magic Qaudrant for IaaS for the first time, making it one of the most improved cloud service companies. Investors are well aware of what a boon Amazon Web Services (AWS) has been for Amazon.
On the flipside, some of Alibaba’s thorniest issues have refused to die. In December, the U.S. authorities placed Taobao, one of the company’s most lucrative units, back in the blacklist over allegations of carrying counterfeit products.
Amazon, on the other hand, offers a more predictable investment with excellent growth runways. The company’s Prime program is great for the top line while AWS is a profit-machine.
BABA stock is likely to outperform AMZN stock over the next two years due to the company’s explosive growth. It’s a a good idea to include both stocks in your portfolio.
As of this writing, Brian Wu did not hold a position in any of the aforementioned securities.