What Should I Buy: Amazon Or Alibaba?

| About: Amazon.com, Inc. (AMZN)

Summary

While Alibaba is demonstrating stable growth, Amazon is speeding up.

Alibaba's trump card is the potential of Chinese market.

EBITDA shows that Amazon is more profitable than Alibaba.

I will try to answer the question: which company is better for a long-term investment - Amazon (NASDAQ:AMZN) or Alibaba (NYSE:BABA)?

Click to enlarge

First and foremost, without going into details and internal structure, let's compare the revenues of these companies.

In the past three years, the dollar TTM revenue of Alibaba has been constantly growing, increasing by an average of 8.1% quarterly. The revenue growth rate in Q2 2016 was one of the highest for the specified period, although it still remained within the established range. I.e. we can diagnose a stable growth of Alibaba's revenue.

Click to enlarge

Source of data: Alibaba Group

TTM revenue of Amazon for the same period has been growing at an average rate of 5.1% quarterly. But over the last three quarters, the sales growth rate of Amazon has been consistently exceeding the established range and, in fact, this means acceleration.

Click to enlarge

Source of data: Amazon

The TTM revenue forecast of Amazon, based on the trend formed during the past five quarters, shows that this figure will exceed $160 billion in Q2 2017, and the quarterly growth will reach 6.9%. It is worth noting that, according to Yahoo Finance, these figures correspond to the average analyst's expectations.

So, in terms of the revenue dynamics, Amazon demonstrates acceleration, while Alibaba only demonstrates stability. However, despite this fact, Alibaba's P/S forward ratio is four times higher than the one of Amazon.

Obviously, the market evaluates these companies' revenue growth potential differently, at least for now.

AMZN PS Ratio (Forward) Chart

AMZN PS Ratio (Forward) data by YCharts

Analyzing Alibaba's revenue within China and abroad, we can see that Chinese market accounts for 90.6% of Alibaba's revenue. Naturally, the potential of the local market is very important for the company.

Click to enlarge

Source of data: Alibaba Group

China is going through a period of structural reforms, the main purpose of which is to shift from foreign trade to domestic consumption. This implies the growth of a solvent middle class.

According to eMarketer's research, the retail sales in China will exceed the level of the United States already this year. And the gap will only be widening in the future. Of course, this is a strong and a positive factor for Alibaba.

However, in my opinion, Amazon is capable of beating Alibaba. While Jack Ma only announces his plan to have 40% of Alibaba's business outside the local market, Amazon has almost reached this target.

Click to enlarge

Source of data: Amazon

According to last quarter, 35.8% of Amazon's revenue is generated outside North America. Moreover, the revenue growth rate on the so-called international market surpassed indicators of the local market.

Click to enlarge

Source of data: Amazon

Amazon's investments in the Indian market are particularly interesting to discuss in the context of the company's expansion abroad. India will be the new China in 20 years, because retail e-commerce sales in India are projected to grow three-fold over the next four years.

Click to enlarge

In my opinion, everything suggests that Amazon has only just begun its expansion into the global market.

Both Amazon and Alibaba are actively developing their cloud-based business, but we can hardly speak about the comparability of their potential. And the first evidence of this is the established growth rates of the revenue from these companies' cloud-based business, indicating that Alibaba is increasingly lagging behind Amazon.

Click to enlarge

Source of data: Amazon and Alibaba Group

As I have already mentioned earlier, the cloud business of Alibaba has brilliant prospects in China, especially considering the fact that the policy of the Government of China is aimed to protect the country's information space, thus benefiting Alibaba. Moreover, the company is also trying to secure a firm foothold on the Japanese market.

But let's not forget that Amazon introduced the Amazon Web Services to the world back in 2006, and Alibaba went public only seven years later. At the moment, Amazon Web Services is already presented in 14 geographic regions around the world and is planning further growth. In the meantime, Alibaba can only count on a share of the Asian cloud market, although it will still have to compete very hard with Amazon.

Click to enlarge

Source: aws.amazon.com

Comparing Amazon and Alibaba, we should mention their financial performance. However, in view of the fact that the companies operate in the context of different monetary policy, tax legislation and standards of depreciation accounting, it would be correct to compare EBITDA instead of the net incomes.

AMZN EBITDA (<a href=

We may draw two conclusions from the graph below. Firstly, according to the results of Q2 2016, Amazon's EBITDA exceeded the one of Alibaba. Secondly, and most importantly, the dynamics of EBITDA growth of Amazon is stable, while the same cannot be said for Alibaba.

The fact that Amazon's net income for now is lower than Alibaba's net income does not necessarily mean that Amazon is worse in terms of financial performance. On the contrary, it is a consequence of the large capital investments Amazon is making into the order fulfillment centers, as well as the vertical integration of its business inside and outside the United States. These investments guarantee the future growth of the company.

AMZN Net Income (<a href=

Alibaba is also actively investing but mainly on the local market and in a wide variety of companies, which does not always coincide with the key line of its business.

In my opinion, Alibaba is more vulnerable in the long term, because it depends mainly on the Chinese market. By contrast, Amazon is a company that already has taken a leadership position on the market of the United States and, at the same time, continues its expansion in the global market. If Amazon continues its vertical integration by developing its own logistics, it will strengthen its position of the fastest and the cheapest retail company in the world even more.

I will probably buy Amazon's shares.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.