This e-commerce and cloud computing titan dominates in one of the world’s fastest-growing consumer markets, but can it take on Amazon just yet?
Alibaba Group (NYSE: BABA) and Amazon (NASDAQ: AMZN) are global powerhouses and competitors, vying for the e-commerce and cloud computing crown. Alibaba was founded in 1999 in China by Jack Ma, five years after Jeff Bezos established Amazon in the U.S. Both companies are similar in their domination of the e-commerce space in their respective regions and have experienced significant growth in recent years. Alibaba’s market cap is significantly smaller than that of Amazon, standing at roughly $590 billion compared to Amazon’s $1.3 trillion.
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Although these companies appear similar, there are some key differences. One key difference is that Alibaba only connects buyers and sellers, whereas Amazon is a reseller selling directly to the customer. Unlike Amazon, Alibaba does not hold inventory or own warehouses, which helps to increase the profit margins.
The sheer size of the Chinese population, which stands at nearly 1.4 billion, leaves a significant opportunity for growth. China’s middle class is also continuing to grow, and according to a McKinsey & Company is set to reach 550 million by 2022. To demonstrate the size of Alibaba’s customer base in its latest quarterly report, it reported mobile MAU’s of 846 million on its China retail marketplaces, which is more than double the size of the U.S population. Jack Ma, in his final letter to shareholders, stated that Alibaba aims to serve 2 billion consumers by 2036.
Alibaba’s core e-commerce division has reached a historic milestone of $1 trillion in gross merchandise volume (GMV) in the last quarter, with the majority coming from sales in China. The e-commerce division is split into several sections — Taobao, Tmall, AliExpress, and Alibaba.com — and makes up 82% of revenue. These platforms differ slightly, take for example, Alibaba.com’s business to business approach or Taobao’s business to consumer approach. The e-commerce division represented an increase in revenue growth of 19% year-over-year, which is a slowdown due to COVID-19. However, the e-commerce division is Alibaba’s only profitable division.
Alibaba is also expanding overseas in Southeast Asia with its e-commerce platform Lazada. Lazada was acquired by Alibaba for $2 billion back in 2016 and is the closest competitor to Sea Ltd’s (NYSE: SE) Shopee platform, which is the market leader in a region that is set to grow to $300 billion by 2025.
The biggest shopping day in the world, “Singles Day” is hosted on Alibaba’s platform. In 2019 the 24-hour event totaled a record of $38.4 billion in GMV, more than two and a half times that of Black Friday and Cyber Monday combined. The latest shopping event “618” was also being monitored for the health of Chinese consumer spending, and Alibaba’s results were strong, with Alibaba handling $98 billion in GMV.
The cloud division has been Alibaba’s fastest-growing division and is the market leader in the Asia Pacific region with a 28% market share according to Gartner. However, Amazon Web Services dominates globally. Alibaba’s cloud computing revenue grew by 58% year-over-year and represented 11% of total revenue. China’s 800 million internet users dwarf the number of users in the U.S. This will create demand for Alibaba’s cloud services along with this the cloud computing market is set to triple to $42.3 billion from 2018 to 2023. Although this segment remains unprofitable for Alibaba, if Amazon is anything to go by, cloud computing will be a huge cash generator in the coming years. Cloud computing only represents a small percentage of Amazon’s revenue; however, it contributes significantly to operating profit.
Short Term Headwinds
The macroeconomic picture has arguably weighed on Alibaba’s stock with tensions between the U.S and China growing in recent years with the “trade war.” There is also a distrust of Chinese companies, and there have been calls for Chinese stocks to be delisted after the Luckin Coffee (NASDAQ: LK) scandal. To a long term investor, these could be seen as short term headwinds provided the company is still executing.
It appears that Alibaba isn’t coming for Amazon’s crown just yet, with the latter having a firm foothold in much of the West. However, it could be argued that the growth in China’s domestic market, along with expansion overseas in Asia and Europe, could propel them to the levels Amazon are at today in the coming years. Amazon, on the other hand, has had a difficult time entering China shutting down its e-commerce marketplace in China in 2018 and demonstrated the difficulties companies have entering China.
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