U.S. Markets close in 3 hrs 20 mins

Should You Buy Alibaba or Amazon Stock?

Rohit Chhatwal

Amazon (NASDAQ:AMZN) and Alibaba (NYSE:BABA) have both demonstrated strong growth trajectories in the last few quarters. Both companies enjoy a wide moat with a long growth runway.

Should You Buy Alibaba or Amazon Stock?

Source: Shutterstock

In the next phase of their growth, these two giants are focusing on expanding in international regions, which will help them diversify their revenue and provide new markets for their services.

Considering these similarities, many investors are likely wondering if BABA stock a better buy than AMZN stock … Here’s what you need to know to answer that question.

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

Revenue and Cloud Growth

While both companies have demonstrated impressive growth, Amazon and Alibaba have reported different growth rates in important segments. AMZN has built a strong cash flow machine in Amazon Web Services (AWS), while BABA needs to do a lot of catching up. Consider that in the past year, Amazon’s cloud cash cow propelled the company to revenue of $23 billion and operating income of $6.5 billion. Alibaba, on the other hand, reported revenue of $2.6 billion with operating loss of over $700 million.

However, Alibaba is putting all its focus in this segment, which gives Alibaba stock significant long-term potential. Recently, Alibaba’s CEO Daniel Zhang mentioned that cloud will be the “main business” of Alibaba in the future. Alibaba also has a much higher growth rate of close to 100% in the last few quarters compared to AWS, which is growing in the range of 40%-50%.

BABA stock will benefit as the company achieves economies of scale in this segment, and we should see rapid operating margin improvement. If the current growth rate is maintained, Alibaba’s annualized cloud revenue should be hitting the $10 billion mark before the end of 2020. This will place the company in the top three among cloud players and give BABA stock investors plenty to be hyped about.

Amazon has a leadership position in the cloud, but it has only recently started focusing on its advertising segment …

This segment is generally considered a high margin business. On the one hand, rapid growth in advertising sales will give Amazon another profitable segment, boosting AMZN stock in the future. On the other hand, Alibaba already has a strong advertising business with its Taobao and Tmall apps.

International Expansion

Both Amazon and Alibaba are in a dominant position in their home markets. They are now trying to improve their presence in international markets.

Amazon is making heavy investments in India to build its business from the ground up. BABA has invested billions in Southeast Asian e-commerce companies like Lazada and Tokopedia. Alibaba has also invested in a host of startups in India like Paytm, Zomato, Big Basket and others. Paytm was valued at $10 billion in the last funding round in which Warren Buffett also invested.

Besides South Asia and Southeast Asia, Europe is also a major target for both the giants.

Alibaba has recently partnered with Spain’s El Corte Ingles, the biggest department store in Europe. As part of its agreement, Alibaba will provide a wide range of support to El Corte, including logistics, e-commerce and cloud services. We should see an increase in the pace of such comprehensive partnerships, which will help fortify the case for BABA stock. Another perk to Alibaba stock is that the company seems to have an upper hand in international expansion due to its rapid investments in the last few quarters. Amazon’s approach of building a business from scratch would take longer to show results. It will be better vertically integrated with Amazon’s platform, but it is difficult to follow conflicting international regulations.

Amazon recently received a setback in India, where it will not be able to sell goods from its own online stores. Amazon will only be allowed to operate a pure marketplace platform in this region. This substantially reduces the growth potential of the company in a region where it has invested billions of dollars in the last few years.

Meanwhile, Alibaba has mostly been an outside investor in international e-commerce startups. This reduces the chances of regulatory backlash and allows a more effective use of the local talent, all of which should help the future of Alibaba stock.

Growing Subscriptions

Amazon stock is a clear winner in the subscription segment. Amazon Prime has achieved close to complete saturation within the U.S. Amazon’s subscription revenues have also been growing at over 50% for the past few quarters. In the recent quarter, Amazon reported $3.5 billion in revenue from this segment. If the current growth rate continues for the next few quarters, Amazon’s subscription revenue could hit a whopping $30 billion by the end of 2020. This provides Amazon stock with an enormous moat and the ability to start new services with a ready customer base.

Amazon has also launched Prime in international regions like Australia and India. The pricing in these regions is lower than the U.S. market, but over time we should see higher Prime membership fees as AMZN gains more pricing power. In Australia, Prime is available for approx. $44 per year and in India it is $15 per year. Amazon is also front-loading the Prime benefits in international regions by providing access to its entire video library and faster delivery options.

Alibaba has been a latecomer to this segment. It has recently started investing heavily in digital media through Youku Tudou. BABA also launched a new membership tier in 2018 called “88 VIP.” Despite a renewed focus, it will take some time for Alibaba to achieve a meaningful subscription business in China. One of the reasons is the lower demand for subscription services in China. We can see this from the example of Tencent Music. Alibaba’s main rival Tencent (OTCMKTS:TCEHY) has reported that the paying customer base for its Music service is only 3.6%. Spotify (NYSE:SPOT) has 46% of its users as paying subscribers.


Valuation for AMZN and BABA Stock

Both Alibaba and Amazon are growing rapidly and have huge growth potential in several segments. But it is also important to look at the valuation multiples of both the companies to select an ideal investment.

Looking at the chart above, Alibaba stock is trading at a cheaper price on both price-to-free-cash-flow and forward price-to-earnings ratio. One of the reasons for the recent price decline in Alibaba stock is the trade rhetoric between U.S. and China. Even a modest trade deal can change the sentiment toward Alibaba, which should help provide decent bullish momentum to the stock.

Over the long term, Alibaba is diversifying rapidly away from its core commerce segment in China. This should reduce the risk associated with BABA stock due to trade tensions and also provide the company a longer growth runway.

So Is Alibaba Stock a Better Buy?

When comparing between Alibaba and Amazon, both the companies have a number of growth segments which should improve margins and revenue in the near future. Amazon leads in cloud and subscription segment while Alibaba has an advantage in international expansion and overall revenue growth.

However, Alibaba is trading at a much cheaper valuation compared to Amazon. Alibaba also has good growth potential in the cloud segment in which it can deliver triple-digit growth for the next few quarters. At the current price point, Alibaba looks like a better bet compared to Amazon.

As of this writing, Rohit Chhatwal did not hold a position in any of the aforementioned securities.

More From InvestorPlace

Compare Brokers

The post Should You Buy Alibaba or Amazon Stock? appeared first on InvestorPlace.