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Battle of the Online Retail Giants – Amazon and Alibaba

Online retail is booming, a sector with $680 billion in annual sales and growing at nearly 10% per year. This is the fertile ground that has made Amazon.com (AMZN) so profitable, drawing in investors and pushing the share price close to $2,000.

Amazon’s dominance in the niche is not unchallenged. From China, comes Alibaba (BABA), the competitor with a domestic customer base over one billion strong. China’s fast-growing e-commerce sector has made Alibaba a winner, in a market with 20% of the world’s population and at $12 trillion, 15% of the world’s economy.  This is a solid foundation.

Both companies got their start in the 1990s, have established successful branding on their home turf and beyond, and now are rubbing shoulders uncomfortably in the global markets. But which one is better for investors?

Amazon.com, Inc. (AMZN)

The reigning champion of online retail is Amazon. The giant’s $990 billion market cap makes it the world’s second largest publicly traded company, and its annual revenues of $232.9 billion make up 34% of the global total of online retail.

On July 15 and 16, Amazon held its annual Prime Day event, a two-day, members-only sale that generated record purchases. While the company does not release sales revenue figures until the quarterly reports, a company press release did state that Amazon Prime customers purchased more than 175 million items during the 48-hour period, making Prime Day’s sales numbers bigger than last Black Friday and Cyber Monday put together.

Amazon’s Prime Day success follows Loop Capital’s Anthony Chukumba’s July 15 prediction. The analyst said that he expected a “highly successful” event, adding that, “The event is an opportunity to highlight Amazon's launch of one-day delivery for Prime members as it serves the purpose of generating significant volume during the seasonally slow time of the year and driving incremental Prime subscriptions.” Chukumba’s buy rating and $2,380 price target suggest a 19% upside to AMZN shares.

John Blackledge, of Cowen, agrees with Chukumba about Amazon’s potential for investors. He looks farther ahead than Prime Day, however, saying that he expects the company’s Q2 earnings report on July 25 to exceed the $5.10 EPS forecast. He says, “We expect revenue and unit growth to accelerate from 1Q19 levels. We forecast 2Q19 reported revenue of $63.4BN… Our revenue forecast is 1.5% above consensus and near the high end of guide range…” His sets a bullish price target of $2,500, implying an upside of 25%.

Overall, Amazon holds a strong buy rating from the analyst consensus, based on 35 buys and 1 hold assigned in the last three months. The stocks average price target of $2,250 gives a 12.9% upside from the current share price of $1,992.

Alibaba Holdings Ltd. (BABA)

Alibaba is working hard to build a presence outside of China. The company’s Ali Express platform, for international orders, is growing in popularity. As a challenger in the global online retail space, however, Alibaba started from a smaller base. Despite China’s huge population, it is only in the last decade that the country’s economy truly begun takeoff.

So, even though Alibaba currently has a solid domestic support, with access to more potential customers in the home market than Amazon has, BABA’s market cap of $450 billion is just under half that of Amazon’s, while the share price of $174 is only 9% of the American company’s. The disparity is visible in annual revenues, too. Alibaba brought in $56 billion in its last fiscal year, about one-fourth of Amazon’s $232 billion.

None of this means that Alibaba is in a worse position than Amazon, only that it is a smaller company. Alibaba has followed a different path to success; where Amazon controls every aspect of its business, from the online platform to the supply line to the shipping warehouse to the deliver, Alibaba is a sales platform that arranges shipping. It keeps down overhead, which in turn helps level the field for the underdog.

Underdog is another relative term, however. As in the business model, Alibaba is also pursuing a different stock-return model. Where Amazon keeps its total number of share outstanding low, at about 500 million, Alibaba has 4 billion ordinary shares. In addition, as part of its move to make an IPO in Hong Kong, Alibaba management proposed a 1 to 8 stock split that would reduce the price per share and increase the number of shares outstanding to a whopping 32 billion. It’s a move to encourage sales, and raise fresh capital. Estimates are, the company can raise as much as $20 billion by listing in Hong Kong. The stock split proposal was approved by shareholder vote, overwhelmingly, on July 15.

Writing ahead of the shareholder vote, Citigroup’s Alicia Yap describes the split as “necessary” for a successful Hong Kong listing. She believes that company management approach the mechanics of the split with care, to “minimize the dilution impact to existing shareholders.” Of the organizational change as a whole, she says, “This latest reorganization upgrade once again demonstrates the focus of Alibaba’s management and its determination in improving strategic direction and growth opportunity…” Yap rates BABA as a buy, and puts a $229 price target on the stock, a 31% upside from current levels.

Raymond James analyst Aaron Kessler agrees with the positive outlook on BABA. Focusing on long-term trends, he says: “Alibaba remains our top large cap pick, given we expect continued solid China ecommerce growth with Alibaba as the biggest winner… and that we believe valuation is attractive at ~10x 2020 marketplace EPS…” Kessler sets a $280 price target to go with his buy rating, indicating his confidence in an eye-catching 60% upside for BABA shares.

Like Amazon, BABA shares hold a strong buy rating from the analyst consensus. Shares are currently selling for $174, so the $220 average price target suggests a 26% upside. Expect those numbers to change in the mid-term future, however, as the approved stock split must take place before July 15, 2020. At the current valuation, a 1 to 8 split will give each share a price of $21.75.

Which Stock Measures Up?

So which online retail giant is the better buy? Both companies show solid earnings and have a stable foundation for current and future business. Amazon has far and away the higher cost of entry, but the share price is high enough that, even with a lower upside potential, the gains in absolute numbers are likely to outweigh BABA’s. Alibaba, however, offers impressive upside potential combined with far lower share price – and that share price will decline sharply within a year, without reducing the upside.

From an investor’s perspective, AMZN is the premium buy while BABA is the budget alternative. Think of the difference between driving a Mercedes and a Honda – the Mercedes will outperform, but the Honda may bring a better value per dollar.