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Should Amazon Investors Be Worried About Alibaba?

Sejuti Banerjea

Amazon (AMZN) and Chinese rival Alibaba have been in the news a lot since the Chinese ecommerce giant decided to go for a U.S. IPO.

But while Amazon is primarily a retailer, i.e. it buys and sells goods and services directly; Alibaba is a marketplace that helps buyers and sellers to connect. It also generates advertising revenues from its retailer partners based on the number of views. Therefore, Alibaba’s revenue model is closer to eBay’s (EBAY) than Amazon’s. And while Amazon necessarily rivals traditional retailers, the Alibaba (or eBay) model treats them as allies.

This means that Amazon’s model requires more work and higher expenses. Amazon needs to directly woo buyers, maintain warehouses and suitable inventory, ship products in record time and ensure that the buyer gets the best value for money. Amazon tries to increase stickiness of customers with its aggressive pricing strategy and Prime subscription model. The only reason it works is because of the significant scale of operations.

Because of the high cost of operation, Amazon needs high volume growth in order to succeed. Alibaba’s strategy for capturing volumes is subtle. Although it’s early days yet, Alibaba is taking pains to maintain a very low profile. It is downplaying the fact that it is a Chinese company (this can upset people because it will gain access to their credit card information). Instead, it is investing in small U.S. ecommerce companies like ShopRunner that could work as its American front. It has also got itself a very American-sounding store brand: 11 Main, which appears to be a high-end niche brand according to the description. So Alibaba is Americanizing and looking for niches where Amazon doesn’t dominate in order to chip away at Amazon’s market share.

The IPO filing has put the two companies in sharp contrast since Alibaba generates significantly higher margins than Amazon. It will be an interesting fight since both companies are giants in their own right and not averse to innovation. But Alibaba seems like a better place to put your money, at least for now.

Amazon shares carry a Zacks Rank #3 (Hold), similar to peers eBay, AutoBytel (ABTL) and Blue Nile. But E-Commerce China Dangdang (DANG), which has a Zacks Rank #2 (Buy) is another Chinese ecommerce company worth considering.

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