Seeking Alpha
Deep value, arbitrage, mid-cap, mutual fund analyst
Profile| Send Message|
( followers)  

Summary

  • Alibaba has a refined business model which takes advantage of the strengths of Amazon (AMZN) and eBay (EBAY).
  • The fact that Taobao is free for sellers makes the platform far more attractive to low-margin sellers than the Amazon model.
  • Alibaba addresses a much wider market covering products ranging from industrial components sold in bulk down to consumer products.

The Looming IPO

Alibaba (Pending:BABA) is set to go public in early September. Approximately $20 billion of shares are to be sold on the NYSE, assigning an $150 billion value to the internet behemoth. Considering the fact that Alibaba's closest peer, Amazon (NASDAQ:AMZN), commands a similar $150 billion valuation, investors can play off the relative value of two companies to make an investment without completing a more rigorous discounted cash flow analysis of Alibaba.

Using relative value investments is a good method when it comes to Alibaba since it would take nothing less than a prophet to accurately forecast Alibaba's growth. The number of variable inputs along with the limited available data on the company make forecasting mere speculation. Nonetheless, a few things are clear with regards to Alibaba that show that it has a better model than Amazon.

Comparisons

Unlike Amazon, Alibaba has been consistently profitable for the past three years, and earnings have been trending upwards for the past four years. As every investor knows, the inherent value of a company lies in its ability to produce profits for shareholders. With Alibaba, investors know that they are getting shares in a profitable company.

Additionally, Investors will gain access to a much larger online payments platform with Alibaba than with eBay (eBay). In 2014, according to Alibaba's F-1 filling, the company processed $623 billion on Alipay, just over a third of Alipay's funds processed and over $155 billion per quarter. In eBay's most recent quarter it processed $55 billion of payments. In February, Carl Icahn attempted to force eBay to spin off Paypal, as analysts believe it accounts for $40 billion of eBay's $70 billion market cap. Assuming a conservative case for Alibaba with similar growth to Paypal, the Alipay component alone would be worth at least $50 billion considering Alibaba's 37.5% stake in the company. With rumors placing an $100 billion valuation on the Alibaba IPO, going long Alibaba at that value is a no-brainer.

Comparing site popularity alone, Taobao already ranks ahead of Amazon according to Alexis as the 9th most popular site globally and the third most popular site in China. Amazon is the tenth most popular site globally and the fifth most popular in the United States.

Looking at the fragmented fashion online marketplace in the United States, Alibaba's Tmall offers a one-stop shop for authentic branded goods. Tmall is already the 7th most popular website in China and stands to grow as Western brands as companies attempt to offer authentic products to the growing luxury goods market in China.

Conclusion

Jack Ma has formed an excellent business model in Alibaba which will continue to grow alongside the Chinese middle class. While it's hard to draw hard growth estimates from the F-1, it is clear that the company is well-run and has developed a profitable platform that will work in the long run. On the other hand, Amazon can only survive for so long before the company has to turn a profit. Alibaba appears to be the better investment here.

Source: Long Alibaba, Short Amazon