WORLDVIEW: Alibaba versus Amazon: 5 things to consider

For an investor, there’s really no need to pick between Alibaba and Amazon - you can buy both. But it can be fun to think about them in comparative terms. So, today, I’m going to lay out five things to consider when you compare these two retail giants.

  1. Market size and growth: Advantage Alibaba
The population of China, Alibaba’s biggest market, is more than four times larger than that of the United States, which is Amazon’s biggest market. And while Americans’ income is six to eight times higher than that of the Chinese, China’s economy is growing significantly faster than America’s. Retail sales are growing about 10% year-on-year in China, compared to around 3% in America.
  1. Market share: Advantage Alibaba
Alibaba accounts for almost 57% of ecommerce sales in China, while Amazon accounts for about 43% of online sales in the US. In addition, online sales account for almost 16% of total retail sales in China but only about 9% in America. Admittedly, data in America is a lot more reliable and robust, but there still seems to be an Alibaba advantage here.
  1. Cloud computing: Advantage Amazon
Alibaba is growing its cloud computing business faster than Amazon, but Amazon has the clear lead in this area. Alibaba made just under $1 billion from its cloud business in 2016, while Amazon made more than $12 billion. Currently, cloud computing services are a high-margin business, but many companies are now moving aggressively into this space including giants Google and Microsoft. Competition here is heating up.
  1. Valuation: Draw
Currently, Amazon is trading at a forward PE of around 250 and Alibaba at around 60. There are, of course, different ways to estimate earnings and PE ratios, but overall, Amazon’s future earnings streams are valued higher than Alibaba’s. In general, this is because China is perceived as riskier than America, and because US investors are more familiar and comfortable with Amazon. Amazon is also successfully entering foreign markets, while Alibaba’s ability to do so is still untried. This seems like a draw.
  1. Product line diversity: Draw
Amazon has its core online retail business, but there’s more to it than that. It also has the Whole Foods grocery business, its cloud computing arm Amazon Web Services, its own product line that includes Alexa and the Kindle, and a growing media and entertainment division. Alibaba is also diverse, with a strong presence in physical malls, a cloud computing business, a small but growing media business, an asset management arm, and a wildly popular digital payments business.  Another draw. So, who’s the winner? A lot depends on your perspective on China. China bulls, who foresee the country continuing its strong growth and eventually becoming a high-income country will favour Amazon. China bears, who think that various issues could derail growth in the Middle Kingdom, will want to stick with Amazon. But frankly, they are both exciting and attractive businesses, and as I said, there’s no reason you can’t have both.