While Amazon.com Inc. (NASDAQ:AMZN) has been a great stock in 2017, Alibaba Group Holding Ltd (NASDAQ:BABA) has been even better.
The U.S.-based online retailer is up 50% so far this year, but the Chinese-based Alibaba has doubled. Its market cap is now $464 billion, against Amazon’s $543 billion.
Not only that, but Alibaba is a better company than Amazon, in many ways. It routinely brings $1 in every $4 of revenue to the net income line. It is growing much faster, over 60% year-over-year. It is much, much smaller, still bringing in less than $10 billion each quarter (the Chinese Yuan trades at 6.63 to the dollar).
Alibaba also has a much larger growth runway, given the size of the Asian market where it makes its home.
For these reasons, I expect the market cap of Alibaba to soon surpass that of Amazon and not look back.
What Alibaba Does Right
Amazon relies on physical infrastructure, like warehouses, but Alibaba consists almost entirely of computer infrastructure. It does much more work through alliances than Amazon, which is why its rise has created 10 other billionaires whose combined wealth is greater than founder Jack Ma’s own.
Alibaba was founded to help small manufacturers connect to retail and industrial buyers. While it has gone far afield of that, with its own online shopping mall and even investments in physical stores, the stock does not reflect that.
Alibaba is primarily a “fintech” company, and the top three leaders in the space, according to KPMG, are affiliates.
Thus, very little of the $25 billion in sales contracted for on its “Singles Day” will flow through the main company, as will little of the fulfillment cost.
If you want to buy the “Japanese Amazon.com,” you should buy JD.Com Inc(ADR) (NASDAQ:JD), whose business models Amazon’s closely and has had roughly the same size gain this year.
BABA has developed its systems, and brand name, against a backdrop of hyper-growth, with literally hundreds of millions of people whose parents were peasants moving into urban skyscrapers. The company also has been quick to move into fast-growing Southeast Asian economies.
Alibaba also faces more competition than Amazon, which can be a good thing. Companies like Tencent Holdings Ltd (OTCMKTS:TCEHY) continue to press it in the local cloud market. This has forced its retailing arm to do things Amazon has yet to dream of, like using artificial intelligence in clothing recommendations.
What Alibaba Does Wrong
Alibaba is not perfect.
The reassignment of Yu Yongfu highlights the problem Alibaba is having in entertainment. The company spun this as a promotion but its film and TV business continues to lose money.
Amazon has its Fire Phone debacle, and Alibaba has its UC Browser, which has been taken down from the Google Play store on charges of delivering malware. As our Josh Enomoto recently wrote, correctly, some of its business practices are questionable.
The Bottom Line
Alibaba has more room to grow than Amazon and a faster-growing market. It is less reliant on physical infrastructure than Amazon, more tied to financial technology like mobile payments.
All this makes me more optimistic about Alibaba than about Amazon. I own more BABA shares than Amazon shares, and share the view of our Bret Kenwell that the stock can continue to rise. Its growth is accelerating and there remains room to run.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN and BABA.
