Earlier, I made an attempt to compare the long-term investment attractiveness of Amazon (NASDAQ:AMZN) and Alibaba (NYSE:BABA). Examining the key financial indicators of both companies, I came to the conclusion that Amazon is more attractive.
In the comments to that article, there were a lot of qualitative criticisms with the main idea that the business models of the two companies are not exactly the same; therefore, a direct comparison will not give quality results.
That is why my next step will be analyzing the historical indicators of both companies' returns using the fundamental approaches of the descriptive statistics. In other words, I would like to compare purely the profitability parameters of the companies' shares without regard to the specifics of their businesses.
I will use the monthly rates of total returns; for Alibaba - since its shares started trading on the NYSE since October 2014, and for Amazon - since the beginning of 2010.
First of all, let's consider the basic measures of central tendency of both the companies' returns.
Besides the obvious fact that the average monthly rate of Amazon's returns is 1.03% higher than that of Alibaba, the following should be noted. The indicators of the arithmetic average, median and the most frequently seen returns (mode) of Amazon are above zero. Moreover, the most frequently seen return (mode) of Amazon is distant enough from the average value in a positive direction:
The situation of Alibaba is different. Mode and median returns are negative, but the average value is positive.
This indicates the asymmetry of distribution of returns of both companies. Moreover, the distribution of returns of Amazon demonstrates a small positive skewness. The investment theory indicates a preference for such phenomenon in choosing investments.
The historic range of Amazon's monthly returns is 36.86%, comparing to 56.34% of Alibaba. At the same time, the maximum indicator of Alibaba's return is 40.89%, comparing to 24.30% of Amazon:
However, it is worth noting that this gap has appeared exclusively due to one month (October 2015), when Alibaba's total return demonstrated record growth. If we exclude this clearly untypical month, the result of which is unlikely to recur in the future, from our analysis, the features of the range of return will indicate the preference for Amazon's shares. In this case, the maximum Amazon's monthly total return will be higher than that of Alibaba.
Next, let's analyze the baseline parameters of risk.
The standard deviation of Amazon's monthly return is less than that of Alibaba. However, it is also influenced by the mentioned month, when Alibaba's return jumped to 40.89%, but even without including this month, the standard deviation of Amazon's return is smaller.
If we analyze only the risk of decrease in the total return below the average value through semideviation, Amazon also demonstrates a lower degree of risk.
Coefficient of variation of Amazon's return is 2.5 times lower than that of Alibaba. This means that the ratio between the risk and Amazon's average return is much more attractive than that of Alibaba. In other words, for each percent of Amazon's average return, there's a 2.5 times lower risk than for that of Alibaba:
Let's now compare the current analysts' expectations about the prospects for both companies' shares.
Based on Yahoo Finance data, the overwhelming majority of analysts recommend to buy the shares of both companies. At that, if Amazon shares achieve its target price, it will mean a growth of 20.16%. In the case of Alibaba, analysts expect a growth of 22.5%, i.e. the average expectations are almost equal.
However, the high case scenario for Amazon suggests a growth of 63% to the level of $1250. At the same time, the high case scenario for Alibaba suggests a growth of only 43% to the level of $139,86. In my opinion, all other conditions being equal, one should choose the shares with higher growth potential for investment.
So, in hindsight, we can see that Amazon stably demonstrated greater returns with lower risk compared to Alibaba.
Assessing what is expected in the future, we can see that Amazon's potential growth exceeds that of Alibaba's.
I will probably buy Amazon.
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.