We think Alibaba (NYSE:BABA) is a good short candidate here considering future risks to the business. We believe 83% of the company's business is at-risk to intense Amazon (NASDAQ:AMZN) competition over the next several years, and furthermore think it is very likely AMZN will steal significant market share from BABA in that time frame. We do not think the current valuation supports a significant loss of China commerce market share and believe shares are materially overvalued at these levels.
BABA is growing in China, with the company witnessing strong Y/Y GMV growth in first-tier cities like Beijing, Shanghai, Guangzhou and Shenzen. This translated into total China commerce growth of 35% Y/Y MRQ. We are concerned, however, on two correlated fronts:
1) This China growth is in the absence of AMZN competition, which is something that will happen very soon.
2) International commerce revenues only constitute 6% of net sales, implying an over-reliance on China commerce revenues which are at-risk to competitive pressures from AMZN.
BABA reported in its most recent quarter that 86% of its revenues were from China commerce, with 83% of net revenues being China retail. This means that 83% of BABA's revenues are directly at-risk to intensifying AMZN competition.
BABA currently owns roughly 50% of retail e-commerce in China with AMZN controlling a mere 1%, but these numbers seem poised to change in the near future. AMZN is aggressively expanding its logistics operations in China, with the company applying to become a maritime shipping broker with the Shanghai Shipping Exchange. This is likely part of a greater AMZN initiative known internally as Project Dragon Boat. It is essentially the company's dream that AMZN controls the flow and delivery of goods to and from China and the United States.
In the near future, we see AMZN and BABA competition in China escalating. Without strong expansion catalysts to offset potential revenue loss from this increased China competition, BABA is a severely at-risk business with 83% of its revenues from China retail. Cloud revenues grew 126% Y/Y MRQ, but still only represent 2% of net sales, while international commerce growth actually lagged China commerce growth.
We further believe that AMZN is particularly advantaged in the long term over BABA in China. Specifically, we have two reasons to believe this:
1) AMZN's dynamic pricing model for top-selling items essentially guarantees the company price leverage over BABA, so we believe price-preferred customers in lower-tier cities in China are inclined to use AMZN.
2) AMZN's wholly-owned logistics may prove to be a more consistent and rewarding delivery experience for consumers than BABA's various vendor delivery service.
Regardless of opinion on which company is better leveraged in China, our thesis still stands that over 80% of BABA's sales are subject to intensifying competition from AMZN. We do not believe the current valuation supports a significant loss of market share. At ~16x earnings vs. a market P/E of ~21x, we do not think shares are baked with enough uncertainty regarding future sales and earnings.
We think BABA is a good short candidate here. Shares are not appropriately valued considering a major threat to sales, and we expect further share price depreciation over the next 12 months.
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.