Alibaba vs Amazon?

E-commerce is still very much the pillar on which Alibaba is built. In 2021, 86% of Alibaba’s revenue came from commerce, in particular in China which contributed over 75% of that figure (65% of revenue overall). Cloud computing and digital media are also revenue streams for the conglomerate, and while there has been an encouraging a 22% Y-o-Y growth, they very much remain as minor divisions within the company.

Amazon, in contrast, have convincingly moved away from being solely a commerce focused company. Despite its roots withing shopping, Q3 of 2021 saw a major milestone for Amazon as its saw revenue generated from services surpass that of online stores for the first time. While the online stores segment’s growth has slowed in 2022, services segments such as AWS and advertising have shown impressive growth (40% and 32% Y-o-Y respectively) and will continue to be major contributors.

AMZN (USD) Dec-17 Dec-18 Dec-19 Dec-20 Dec-21 Revenue 177,866.00 232,887.00 280,522.00 386,064.00 469,822.00     +30.9% +20.5% +37.6% +21.7% Net Income 3,033.00 10,073.00 11,588.00 21,331.00 33,364.00     +132.1% +15.0% +84.1% +56.4%             BABA (CNY) Dec-17 Dec-18 Dec-19 Dec-20 Dec-21 Revenue 158,273.00 250,266.00 376,844.00 509,711.00 717,289.00     +58.1% +50.6% +35.3% +40.7% Net Income 43,675.00 64,093.00 87,886.00 149,433.00 150,578.00     +46.7% +37.1% +70.0% +0.8%

Over the past 5 years, both companies have shown impressive growth. While Alibaba has generated the more stunning growth in revenues, it has begun to struggle to maintain the profitability. In fact, over the last twelve months, sales growth has slowed to +16.6%, and net income has decreased by over 65%.

Amazon has not managed to rapidly accelerate its sales as quickly as Alibaba, but its substantial diversification into many other services has meant that it has managed to keep up its profitability as well as the revenue growth.

For an examination of balance sheets, two ratios will allow the companies to be more easily compared.

Current ratio = Current Assets/Current Liabilities

The current ratio allows investors to see whether a company’s current assets could be sold off to pay off short-term obligations within a year.

Cash asset ratio = Cash/Current Liabilities

The cash asset ratio essentially measures the liquidity of a company – a ratio of greater or equal to 1 means that the company will be able to pay off its short-term debts with its cash immediately.

  Amazon (USD) Alibaba (CNY) Current Assets 161,580.0 675,138.0 Cash and Cash Equivalents 96,049.0 494,933.0 Current Liabilities 142,266.0 410,507.0

Amazon has a current ratio of 1.14, which shows its ability to pay off short term debt after liquidating its assets. With a 0.68 cash asset ratio, while this means Amazon would not be able to pay off its debt immediately using cash at hand, overall Amazon’s balance sheet is fairly healthy.

However, this performance is dwarfed by Alibaba’s balance sheet, which remains as a fortress. Alibaba’s current ratio measure at 1.64 and cash asset ratio of 1.21 are industry-leading figures and showcases its impressive liquidity. Alibaba’s balance sheet strength not only comes in the short term – it has sufficient cash to cover 4 times its long-term debt (CNY 131,731.0).

Amazon, despite its all-time low P/E, still continues to trade at a high figure in comparison to competitors. A P/E at 41.99 is predicated on significant annual revenue growth estimates, which, whilst is possible, could also meet major headwinds.

In comparison, Alibaba may be at an all-time low market valuation. While it seems BABA shares have halted from its freefall since October 2020 (-USD208.99, -67.4%), BABA is still trading at a low P/E, one which is comparable to its 2017 metrics. In 2022, BABA shares are trading at a 2.10x P/S ratio compared to 2017 when its P/S ratio was 11.21x. 5 years ago, the company generated $9.22 of revenue per share compared to $48.70 today.

Amazon’s risks come twofold. Firstly, its high P/E in comparison competitors may create a glass ceiling for its stock price which can be argued as being propped up by speculative and unsustainable growth predictions. In addition, Amazon’s share price is more likely to see higher volatility. Its 5-year 1.1 beta indicates that it is more sensitive to changes in the general market and shareholders will be exposed to increased market risk, compared to the 0.88 beta of Alibaba.

Risks for Alibaba are more concrete. Having a dominating proportion of market share was instrumental to the rise to superstardom for Alibaba, and this may come under fire as it seems likely for the Chinese authorities to keep cracking down on monopolistic practices. In addition, Alibaba’s less diverse revenue streams and dependence on retail may be a worry to investors as China continues to reposition away from “soft tech” (e-commerce, edtech) and issue more favourable policy to “hard tech” sectors (manufacturing, semiconductors, EVs). Despite this, Alibaba still show promise within the cloud computing sector which will no doubt continue to rapidly grow.

Through assessing a few key factors, we believe Amazon to have more resilient business model with fewer qualitative risks, whereas Alibaba is trading at an attractive valuation and therefore has a greater quantitative upside.