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Alibaba Is Quietly Undermining Amazon’s Influence

Alibaba stock - Alibaba Is Quietly Undermining Amazon’s Influence

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Alibaba (NYSE:BABA) and Amazon (NASDAQ:AMZN) are aggressively ramping up their operations in a number of international markets outside their respective home base. This has led to an increased rivalry in these regions, as both Alibaba stock and Amazon compete against each other in Southeast Asia and South Asia.

If Alibaba gains a significant market share in these regions, it would provide the company with a much bigger growth runway than Amazon. This will also increase the bullish sentiment toward the stock.

Alibaba and Amazon need to establish their presence in international markets to diversify their revenue base and have better growth potential.

On the one hand, Alibaba has tried to partner with startups who have already scaled up their operations. On the other hand, Amazon has mostly tried to build its business from the ground up.

The jury is still out over which business model will be successful in the long term. However, Alibaba and the companies it has partnered with are already showing strong signs of a successful market penetration.

Make or Break Moment for Both Giants

Alibaba and Amazon are investing huge piles of cash to ramp up their operations in South Asia and Southeast Asia. Together, these two regions are home to one-third of the total world population and have a nominal GDP of close to $6 trillion. The average GDP growth in this part has been 6%-8% in the past few years, which has allowed rapid growth of the middle class. There is also a significant increase in internet users due to cheaper smartphones and better networks.

Alibaba was a latecomer in investing in these regions compared to Amazon. Amazon started its Indian operations in 2013. It has committed to invest $5 billion to build up its operations. Recently Amazon is reported to increase this investment by another $2 billion after Walmart’s acquisition of Flipkart, which is Amazon’s main rival. Alibaba has mostly focused on Southeast Asia by getting majority control of Lazada and Tokopedia.

In India, Alibaba has relied on local startups to scale up their operations and directly compete with Amazon and Walmart. Alibaba has a significant stake in Paytm, which is a leading digital wallet and financial services company in India.

Paytm recently notched a big win when it was reported that Buffett has built a stake in the company for $300 million. This values the company at a whopping $10 billion. Alibaba has also invested close to half a billion dollars in the leading online grocer, BigBasket. One of the latest investment has been in Zomato, which is a food delivery and restaurant search app. Alibaba is planning to enter the e-commerce segment of India through Paytm Mall in which it has invested over $600 million along with Softbank.

Alibaba has recently bought Pakistan’s main e-commerce company, Daraz, for an undisclosed sum. It has purchased a 20% stake in Bangladesh’s bKash, which is the leading mobile financial services company. This investment pattern across South Asia and Southeast Asia shows that Alibaba is relying heavily on local startups to build its presence in these regions.

Besides e-commerce, it is also looking to replicate the success of Ant Financial in payments ecosystem of these regions. The banking presence in these regions is still relatively low which should help mobile payment services to expand their presence.

The level of investments will only increase in the near term as both Alibaba and Amazon try to increase their market share and expand their presence in e-commerce, payments, media, logistics and other services. If Alibaba or Amazon is able to gain a decisive market share across a broad spectrum of services in South Asia and Southeast Asia, it will show the long-term potential of their business model.

Why Alibaba Has a Significant Lead?

Although Alibaba was a latecomer to these regions, it has built up its presence by good investments and partnerships. By focusing on local startups Alibaba has been able to prevent any regulatory obstacles and also leverage local talent. Amazon’s strategy of building operations from scratch is not only more time consuming but could eventually cost more. Even after five years of operations, Amazon is yet to trounce the market leader Flipkart in India. Now that Flipkart has been bought by Walmart, it would be even more difficult for Amazon to increase its market share.

On the other hand, Alibaba’s investments in Paytm have paid off as the company is already in a dominant position in the payments ecosystem within India. Alibaba is now using Paytm Mall as a springboard to enter e-commerce segment in India. The investment in Big Basket has also been very successful as it now holds a significant share in online grocery business.

Besides the success of individual investments, Alibaba has a huge support due to Softbank’s investment in South Asia and Southeast Asia. In many segments, the investments of Alibaba and Softbank are complementary. The size of Softbank’s investment portfolio is also important. For example, Softbank has invested close to $8 billion in Indian startups in the past few years. This gives Alibaba an option to make an entry in various segments at a later stage.

Future Trajectory

If Alibaba gains a significant lead in South Asia and Southeast Asia over Amazon, it will have an oversized impact on the stock of both the companies. Both these regions have a lower GDP compared to Europe, North America and China. But they are growing at a faster rate and have a rapidly growing middle class.

Also, this is more of a neutral ground where the two giants have fought away from their home base. Amazon will always have an upper hand in U.S. and Alibaba will have an edge in China. However, it is also important to see how these two companies perform in regions where neither has a home team advantage.

Both the giants are planting the seeds for a future expansion in Europe. This would be another neutral ground. The winner in South Asia and Southeast Asia should get a significant confidence boost to invest aggressively in Europe to replicate its success.

Investor Takeaway

Eventually, it will come down to the business model and execution. Amazon’s bottom-up approach of building its operations has taken a long time and can face regulatory hurdles due to lack of partnerships with local players.

Currently, Amazon has a minor lead in India and Alibaba has a lead in Southeast Asia.

In another 18-24 months, we should see one of these two giants cementing their position in South Asia and Southeast Asia.

There is a very high probability that Alibaba will come out on top, which can also boost the bullish sentiment for its stock. I have a “strong buy” rating for Alibaba.

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