Amazon or Alibaba?
- By Jonathan Poland
I am constantly baffled by the respect shown to Amazon.com Inc. (AMZN) in the market. The stock trades at obscene multiples to its income. While it is a low-cost producer in retail and technology (e.g., Marketplace, Kindle, AWS), the actual switching costs are fairly low on every one of the products and services it sells. Wish, Jet and other smaller online markets, however, are taking share away from Amazon in that category. In addition, Alphabet Inc."s (GOOG) Google and Microsoft Corp. (MSFT) are taking share away in the cloud space, at even better margins.
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The intrinsic value of AMZN
Even retailers are starting to come around on user experience, shifting more and more to e-commerce for their marketing spend. I think it is only a matter of time before Amazon"s market capitalization is struck hard with the reality stick. Either that or Bezos is going to strip out billions across the selling, general and administrative costs and push that to the bottom line. To be in-line with other tech companies, the net income should be in the $20 billion range and growing.
Just to be clear, I do not really shop on Amazon. I will browse its platform only a few times a year when I cannot find an obscure item anywhere else. I do trust the company with my data and service. I just do not think it is worth $559 billion. Then again, most companies are propped up on a mountain of sand and dust thanks to low interest rates, abundance of capital and American consumerism. All of these traits will be strongly tested in the years to come.
Alibaba Group Holding Ltd. (BABA) is very similar to Amazon in the long list of platforms (mostly retail goods) that generate billions for the company. The company has also gained a lot of ground on Amazon, trailing the U.S. e-commerce giant by just 23% in market capitalization on a 104% gain year to date. Yet, unlike Amazon, Alibaba generates a far superior level of financial performance.
Amazon
Revenue (TTM): $161.1 billion
Gross margins: 36.5%
Operation margins: 2.0%
Net earnings: $1.9 billion
Price-sales: 3.5 times
Price-earnings: 295 times
Alibaba
Revenue (TTM): $29.5 billion
Gross margins: 62.4%
Operation margins: 32.6%
Net income: $9.1 billion
Price-sales: 15 times
Price-earnings: 50 times
Both companies look for another excellent year and the forward multiples will be lower, down to 27 times earnings for Alibaba and 146 times earnings for Amazon. Amazon could probably push more profit to its bottom line, but the precedent is not there to believe it will happen. As a consumer, you have to love what Amazon does, but from a value investor standpoint, it is hard to place a price on the stock because no one could wait 100-plus years to recoup their money if they bought the whole company.
What I believe will happen
The Chinese consumer will eventually start buying more and more of their own goods and services, and the yuan will likely rise versus the U.S. dollar. If this happens in the next decade, look for Alibaba to crush Amazon. If the yuan was on par with the dollar today, Alibaba would be generating over $60 billion in profit on close to $200 billion in sales, putting it well ahead of Amazon.
Even without a currency adjustment, Alibaba will continue to grow faster than Amazon. While China"s total growth may continue to slow, chances are it will remain one of the fastest-growing economies worldwide. IMF is forecasting an annual rise of 6.5% to 6.8% from 2018 to 2022. Obviously, if Amazon can break into China, it would change the game. Until that point, Alibaba is the better buy.
Disclosure: I am not long/short AMZN or BABA.
This article first appeared on GuruFocus.
Warning! GuruFocus has detected 3 Warning Sign with AMZN. Click here to check it out.
The intrinsic value of AMZN
