BABA VS Amazon.Com Inc: "changing gears" after the epidemic, who can win the long-distance race under the market difference?

BABA and Amazon.Com Inc are two undisputed leaders in the e-commerce industry. BABA is the largest e-commerce platform in China by profit, while Amazon.Com Inc ranks first in both revenue and profit in the United States. In addition to having similar core businesses, Amazon.Com Inc and BABA also lay out the field of cloud computing.

The difference is that in the e-commerce business, Amazon.Com Inc sells goods directly, while BABA relies almost entirely on third parties; Amazon.Com Inc's biggest market is the United States, while BABA is China.

Most importantly, one of Amazon.Com Inc's profit drivers is the cloud business, whose core e-commerce business is not always profitable; BABA's e-commerce business is profitable, but the cloud business needs subsidies.

Although there are enough differences between Amazon.Com Inc and BABA, the two companies are the largest e-commerce participants in the world's first and second largest economies, and they are worth comparing.

Cooperation is greater than competition, BABA's performance wins.

Generally speaking, if you search the list of Amazon.Com Inc competitors on the Internet, you will see BABA among them.

However, Amazon.Com Inc and BABA are in the same industry, but in different regions, the degree of competition is difficult to measure. In some markets, there may be some competition between Amazon.Com Inc and BABA, but the competition is very limited.

In the US market, the two companies are actually a symbiotic relationship. BABA is one of the sources of commodities sold by shippers on Amazon.Com Inc, Shopify Inc and eBay. Therefore, Amazon.Com Inc and BABA can learn from each other's success in the United States.

In the Chinese market, there is little competition between Amazon.Com Inc and BABA. Amazon.Com Inc withdrew from direct sales in China in 2019 and now only does cross-border transportation. It takes 11 to 20 working days for consumer parcels to be shipped from the United States to China, which poses an obstacle for Amazon.Com Inc to gain significant market share in China.

Therefore, we can only make some comparisons from the financial aspect. BABA has been growing faster than Amazon.Com Inc in recent years, despite a sharp slowdown in the past two quarters.

Note: basic financial information of Amazon.Com Inc and BABA in 2021

As shown in the table, BABA's income is growing faster than Amazon.Com Inc's, and there is a small decline in the bottom line of 2/4. Although BABA's profit decline is more serious than Amazon.Com Inc, BABA successfully maintained a positive FCF during the TTM period, while Amazon.Com Inc did not. BABA's operating income / profit before interest and tax also declined slightly.

We can also calculate some profit indicators from the above figures, which are shown in the following table:

Similarly, this comparison is beneficial to BABA. Amazon.Com Inc beat BABA on only one profit indicator (gross profit margin), but it won little in this respect. At the same time, Ali Baba's net profit margin has almost doubled compared to Amazon. In terms of profitability, BABA is also better.

BABA has the advantage of multiple indicators, Amazon.Com Inc has limited room to rise.

After looking at the finances of Amazon.Com Inc and BABA, we can turn to their valuations. In this respect, BABA is obviously cheaper than Amazon.Com Inc. Its key multiple is lower than that of Amazon.Com Inc, and it has more advantages in the DCF model.

In the table below, I have compiled some valuation indicators for Amazon.Com Inc and BABA:

Judging from the table, BABA not only has a lower price-to-earnings ratio than Amazon.Com Inc, but also has many index advantages in the real value field. Earnings and cash flow multiples of about 12 times are not much higher than the trading price of bank shares, but BABA is a technology giant with an annualized income growth rate of 40 per cent in five years.

You can also use discounted cash flow analysis to compare Amazon.Com Inc and BABA. I used the yield on the 10-year Treasury bond as the discount rate to value BABA for DCF and got a fair value of $253.

Amazon.Com Inc's DCF valuation is a more complex topic. If you use a discount rate of 3 per cent and assume that the 20 per cent 3-year CAGR revenue growth rate continues over the next five years and then slows down to 0 per cent, you can calculate a fair value of $165.

Compared with the current price, there is still room to rise, but less room than BABA's. If BABA rises to $250, it will rise 140%. If Amazon.Com Inc rises to $165, it will only rise by 35%.

Even if the same discount rate is used for Amazon.Com Inc and BABA, even if the growth assumption is more conservative, BABA will be worth more.

"change gears" after the e-commerce epidemic, the market differentiates the growth rate of the two

A shift to the long-term business prospects of Amazon.Com Inc and BABA is necessary because the above valuations of both stocks assume that they can return to positive earnings growth in the future, so we need to assess whether this is the case.

First, take a global look at the industry's prospects. By 2028, e-commerce will grow at a compound annual growth rate of 17.4%. This sounds good, but it is not consistent with what happened this year. Amazon.Com Inc, BABA and Shopify Inc have all slowed down significantly this year.

Growth should pick up again in the future, but I'm not sure if valuation forecasts are too optimistic. The epidemic is a huge driver for e-commerce companies in 2020 and 2021, driving revenue growth. We can expect the industry to grow in the future, but we will not be able to maintain the high growth during the outbreak.

Secondly, it analyzes the market growth of Amazon.Com Inc and BABA. Both the United States and China have a good history of GDP growth, but China's growth rate is faster. The 10-year compound GDP growth rate in the US is 2.1 per cent. China is 6%. Therefore, BABA will benefit from the growth of the Chinese market to maintain a certain advantage over Amazon.Com Inc.

Finally, BABA and Amazon.Com Inc face similar competition. Amazon.Com Inc is competing with Shopify Inc, eBay and Walmart Inc; BABA has competitors such as JD.com and Pinduoduo, whose main competitors are similar in number and scale.

Given that Amazon.Com Inc and BABA face similar competitive dynamics, it seems that China's advantage in economic growth gives BABA an advantage in long-term business prospects.

Overall, from the traditional valuation model and market development, BABA may be a better investment choice than Amazon.Com Inc, but we did not expect Amazon to outperform Walmart Inc 20 years ago, and it is impossible to guess where e-commerce will go 20 years later.

As Charlie Munger said: "your mind can deceive you, so it's best to take some precautions and be vigilant about your point of view."