Chinese e-commerce company Alibaba Group Holding Ltd (NYSE:BABA) has been all the rage over the past few months. An earnings miss caused BABA stock to decline, but investors seized that opportunity to snap up the “Amazon of China.” In the end, shares finished the month up nearly 8%.
Alibaba stock is definitely a great opportunity for investors that want to add some exposure to China to their portfolio. It’s also a good tech and e-commerce play. But for those traders who are comparing the firm to U.S. e-commerce juggernaut Amazon.com Inc. (NASDAQ: AMZN), there is one huge difference — risk.
The risk factor for Alibaba stock is huge, while Amazon offers a more secure investment that also has some pretty great growth potential.
BABA Stock Potential
That’s not to say that BABA stock is a dud. Alibaba has proven itself to be a huge growth opportunity for investors that are willing to take on a bit of risk. The company generates an impressive amount of free cash flow and management’s gung-ho attitude toward investing in the business’ future mirrors that of Amazon, especially in the early days.
One of the ways Alibaba is setting up its business for the future is through cloud computing. The firm’s most recent earnings showed that revenue from its cloud business gained 103% from a year earlier. The firm has been investing heavily in developing its cloud arm, and many are drawing parallels between Amazon’s AWS and Alibaba’s cloud division.
BABA is fighting to become not only China’s Amazon, but also its YouTube and Twitter Inc (NYSE:TWTR) as well. That’s a lofty goal, but Alibaba appears to be up to the challenge. If it succeeds, it would make Alibaba one of the most powerful companies in the country.
International Reach
When comparing BABA stock and AMZN, however, that last line is the most important. Right now, Alibaba has the potential to become one of the most powerful companies in China, while Amazon has already become one of the most influential companies in the world.
It’s unclear exactly how Alibaba plans to extend its reach beyond China’s borders, but for the company to compare against Amazon, it will need to do just that.
The China Effect
Because BABA only operates in Asia, it’s hugely dependent on China’s economy — something that should give investors at least a little pause. The Chinese economy has been on the rocks for a few years now and Moody’s recent decision to cut China’s credit rating makes BABA a little bit less desirable. Not only that, but cultural differences between the U.S. and China could influence BABA stock’s behavior.
However, perhaps the most worrying thing about BABA stock’s reliance on the Chinese economy is the possibility that the country might be heading toward a dot-com bubble.
Bottom Line
BABA stock definitely has the potential to deliver impressive gains in the coming year as it continues to build out its business. There’s no question that the firm is doing a lot of what Amazon did when it was starting out in the U.S. However it’s risky.
There are a lot of factors working against BABA stock, namely its location and lack of international growth plans. Between its media opportunities and its growing cloud division, BABA is definitely worth considering.
But if you’re trying to decide between adding AMZN or adding BABA to your portfolio, the risk that BABA carries just isn’t worth it.
As of this writing, Laura Hoy was long AMZN.
