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How Alibaba Is Losing its Most Important Advantage

GuruFocus.com
·3 min read

- By Panos Mourdoukoutas

Recently, Alibaba Group Holding (BABA) seems to be losing its most important advantage - an Amazon (NASDAQ:AMZN) style monopoly of the e-commerce business that has before now gone unchallenged by the Chinese government. Both Amazon and Alibaba benefit from their e-commerce monopolies in their respective home markets, and losing that benefit could prove bad for Alibaba, in my opinion.


The Chinese government has recently launged an investigation into Alibaba's anti-competitive practices. It's the latest indication of Beijing's determination to curb the country's ever-expanding internet monopolies.

For years, Alibaba enjoyed a meteoric rise in the domestic and global markets. In fact, Alibaba is beating Amazon in several key metrics, like gross profits, revenue growth and operating income (see table below).

Company

Alibaba

Amazon

Gross Profits

$230B

$114.99B

3-year Revenue Growth (%)

45

25.6

3-year EBITDA Growth (%)

38.1

42.2

Operating Income Growth (%)

18.83

5.72



Key metrics: Alibaba versus Amazon

Company

ROIC

WACC

ROIC-WACC

Alibaba

8.46%

6.64%

1.82%

Amazon

11.37%

7.76%

3.61%



That's thanks to a long list of advantages that formed a "moat" around its market. Other sources of moat include location, economies of scale, economies of scope, networking and most importantly, government support.

Though such relations are important in every country, they are even more critical in China. The government is the economy's gatekeeper, and it has much greater power than the U.S. government to decide who will be in what business and for how long.

Alibaba's Taobao site, for example, beat eBay Inc. (EBAY) in China back in the early days when Alibaba was a startup and eBay an industry giant thanks to the government supporting the player on its home turf. They also helped Alibaba be included in the list of the five companies chosen by the Chinese government to enter Internet banking. That's an enormous opportunity in a country where the government owns the banks.

Government opposition can break industry giants as quickly as it made them. That's what appears to be the case with Alibaba lately. One prime example of this is how back in November, Chinese regulators put the stopper on Alibaba's plans for its initial public offering of its Ant Group subsidiary.

Just last week, the State Administration for Market Regulation launched an antitrust investigation into Alibaba's practices. Financial markets have taken notice, sending Alibaba shares skidding. On Friday, shares closed at $222.

While it is still unclear how far Chinese authorities will go to restrain Alibaba's monopoly, one thing is clear: with government opposition, the company is vulnerable to competition from fast-growing startups like JD.com Inc. (JD) that could undermine its dominant position in the world's largest Internet market.

Disclosure: I have no position in Alibaba. I own shares of Amazon.

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This article first appeared on GuruFocus.