When Alibaba Group Holding Ltd. (NYSE:BABA) commenced its initial public offering (IPO) nearly five years ago, the most frequently drawn comparison was that Alibaba is “the Amazon.com (NASDAQ:AMZN) of China.” Since than Alibaba stock has only perpetuated the comparison.
The comparison is compelling due to the sheer mass of China’s online retail market. However, what makes Alibaba stock an even more interesting investment is the company’s increasing willingness to go head-to-head with Amazon in a variety of market segments and locations, including the U.S.
Last week, the company said it will now allow U.S.-based sellers to market their goods to Chinese buyers, news that contributed to Alibaba stock posting a weekly gain of 3.32%.
“Roughly one-third of buyers on Alibaba are US-based,” reports The New York Post. “More than 95% of sellers come from China. This plan will open up markets to US merchants in countries including India, Brazil and Canada. US merchants will also be able to sell to other US-based businesses.”
Alibaba and Amazon
There are some interesting statistics regarding the Amazon marketplace, the place where small businesses sell their goods to buyers. For example, there are supposedly over 5 million sellers on the 12 Amazon marketplaces in the U.S., U.K., Germany, France, Canada, Japan, India, Italy, Spain, Mexico, Brazil, and China, but data indicate there are roughly 1.8 million items for sale.
What is clear is that Amazon is the world’s largest online retailer and posted nearly $233 billion in 2018 and its revenue and earnings are growing, despite a recent quarterly hiccup. However, it is easy to understand why sellers would consider embracing Alibaba. Simple math confirms as much.
Various research firms indicate Amazon’s recently completed two-day Prime Day affair generated $6 billion. Sounds nice, but that number is paltry is compared to the revenue generated by China’s Singles Day in 2018. With Alibaba leading the way, Singles Day, a 24-hour event, posted 2018 revenue of $30 billion.
In an article out earlier this month, Fast Company appears to be spot on with the headline: “Amazon Prime Day is a Cheap Knockoff of Alibaba’s Singles Day.”
Alibaba Is Still Growing Fast
Keeping with the theme of simple math, data confirm that China’s internet and direct marketing retail segments are growing significantly faster than those in the U.S.
“Analysts expect the sector to experience 12% overall sales growth in the next year, compared to just 6% in the US,” according to Global X research. “Despite higher growth expectations, the Chinese sector has lower debt burdens and is cheaper across forward price-to-earnings, forward price-to-sales, price-to-book metrics.”
Global X sponsors the Global X MSCI China Consumer Discretionary ETF (NYSEARCA:CHIQ), an exchange traded fund (ETF) in which Alibaba stock is one of the largest holdings.
On a more basic level, many sellers are growing frustrated with Amazon, complaining that the company wantonly suspends or closes accounts with little or no notice while leaving the sellers without much recourse. Think of it this way: should there be lawyers dedicated to helping jilted Amazon sellers? In a perfect world, no, that field of law should not exist, but there are in fact attorneys who specialize in this.
The Bottom Line on Alibaba Stock
The point here is not to assail Amazon stock. The company has proven adept at creating shareholder appreciation, a theme that is likely to continue as the e-commerce and online retail markets grow.
However, Amazon’s dominance has disadvantages, including the presentation of some headline risk as regulators and candidates for the presidency complain that Amazon has had an adverse impact on small retailers.
These are not issues Alibaba has to contend with in China, home to a much larger online retail market than that of the U.S. Plus, Alibaba stock can deliver comparable or superior growth to that of Amazon with earnings multiples that, for now at least, are lower. Alibaba stock trades at 20.50x forward earnings compared to 50.65x for Amazon.
Todd Shriber does not own any of the aforementioned securities.
