It’s easy to compare Alibaba to Amazon. And BABA vs. AMZN stock has been a virtual standstill. Which is the better stock going forward?
The “BAT” stocks—Baidu (BIDU), Alibaba (BABA) and Tencent Holdings (TCEHY)—tell a compelling China story. The three companies have a combined market capitalization of over a trillion dollars and dominate their industries in China, online search, e-commerce and messaging, respectively. Our Cabot Global Stocks Explorer subscribers made outstanding profits in these stocks.
Today, I want us to compare a couple of strong growth stocks, though comparing these three would be like comparing apples, oranges and small potatoes, especially since Baidu is a relative pipsqueak at just $40.7 billion in market cap.
I think a better comparison would be between Alibaba and Amazon (AMZN) because 1) they’re in the same industry, 2) they dominate their respective markets within that industry, and 3) each one has a dynamic leader whose ambition seems to extend to other galaxies.
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Operating revenue increased over 70%.
Gross profit surged 122%.
Net income was up over 60%.
With that in mind, here’s a comparison of the globe’s two biggest e-commerce companies along with a personal opinion as to which one is a better investment right now. As usual, using Cabot’s approach to growth stocks, we’ll look at the stocks’ stories, numbers and charts.
BABA vs. AMZN: Stories, Numbers, Charts
Let’s begin with the charts, because the similarities between the two since the start of the latest bull phase in 2016 seem remarkable to me. Here’s the chart.
From late-2015 until June 2018, the performance of these two e-commerce giants was often so parallel that you could barely put a playing card between them. Yes, Amazon (the gold line) had a flat patch from April to October in 2017, and there was a conspicuous divergence between the two stocks in the second half of 2018. But after the steep correction in late 2018, both stocks have become re-synchronized and both have made considerable gains in the last one year (BABA is up almost 30% as of February 2020, while AMZN has gained 33% in that same period).
The lesson here is that the appetite of big investors for mega-cap e-commerce stocks knows no borders. Big money wants to buy big, fast-growing companies, and the distinction between developed and emerging markets is looking almost quaint.
Despite the trade war-related setback both companies suffered in 2019, the long-term growth numbers for AMZN and BABA are strong, which isn’t surprising. Here are a couple of tables summarizing revenue and earnings growth.
In value terms, AMZN trades at a P/E of 81 and BABA’s P/E is 23. Since most of the growth stock screens that I’m familiar with call for growth of 20% or more, I think these companies qualify.
Both stocks are hugely liquid and have a ton of institutional sponsors, so there’s nothing there to choose.
With Jeff Bezos at the helm of Amazon and Jack Ma in charge at Alibaba, neither company lacks for ambitious, intelligent leadership. Jeff and Jack have both been using their massive free cash flows to move into cloud services and original content production, while also acquiring (or forming joint ventures with) businesses in allied fields. Jeff bought the Washington Post newspaper and Jack has turned China’s Singles Day (November 11) into an online media event that gets as much press as Black Friday does here in America.
My decision on which stock to favor in BABA vs. AMZN comes down to this: If you can only buy one, I’d favor Alibaba, if only because China’s population is bigger (about 1.4 billion versus the U.S.’s 327 million) and China’s GDP growth rate of 6% is still much faster than the U.S. rate of 2.3%, though the gap is narrowing. Each of those statistics points to greater potential in Alibaba.
However, it makes no sense to me to buy only one. Buying a stake in both AMZN and BABA stock gives you a little protection should either company falter (or falter more than they did during last week’s coronavirus-induced market crash). And while the old notion that emerging markets would provide a hedge if developed markets ran into an iceberg (or vice versa) has been undercut by globalization, having a blue chip and a red chip looks like a potentially useful diversification.
Timothy Lutts heads one of America’s most respected independent investment advisory services. Each week, Tim personally picks the single best stock in his exclusive Cabot Stock of the Week advisory. Build your wealth and reduce your risk with the top stock each week for current market conditionsLearn More
*This post has been updated from an original version.