Ever since Alibaba (BABA) had its record-shattering U.S. IPO, it appears the Chinese e-commerce giant and its American competitor, Amazon (AMZN), are destined for a Wall Street showdown. In an unpredictable market, with many potential outcomes, I will focus on two questions: 1) can Amazon convert its R&D investments into positive quarterly reports and 2) will Alibaba continue to build upon its momentum and run Amazon out of American markets?
Although these two companies are on a collision course, their financial backgrounds are incredibly different. When deciphering Alibaba's statistics we see that it commands a $294 billion market cap, increased earnings growth of 196.14%, and revenue growth of 56.06%. Moreover, the company’s retail website has sold over $250 billion worth of goods. These positive numbers have Alibaba’s stock hovering around $120.
On the other hand, Amazon recently announced another big earnings miss. Not only did its results represent the largest historical difference between actual EPS and consensus EPS ($-0.95 vs. $-0.74), Amazon's announcement also marked its third earnings miss (in the last five quarters); Amazon hasn't beat earnings expectations since Q1 2013. Compared to Alibaba, Amazon's figures are incredibly disappointing. The company’s revenue growth is up a mere 21.87%, while its $141 billion market capitalization is roughly $115 billion less than Alibaba’s. The worst figure for Amazon, however, is its earnings growth, which is down 255.84%. In stark contrast to Alibaba, Amazon is quickly crashing towards its 52-week low of $284, as it hovers around $300.
If you are solely basing investment decisions on current financial numbers, Alibaba is the clear favorite. However, if you have learned anything from reading my articles, it's that great investment decisions are based on long-term prospects. This shouldn’t discount Alibaba's current advantage over Amazon, but serves to remind investors that both of these companies will be around for a long time. That said, let's examine why Alibaba is soaring and Amazon is stumbling.
About a month ago, I went into detail about Alibaba and its massive advantage in the global e-commerce market. If you’re looking for an in-depth analysis of Alibaba, please refer to my earlier article. In a nutshell, Alibaba’s rapid growth is driven by its dominant Chinese e-commerce market share. A massive market in itself, controlling the Chinese market has allowed Alibaba to expand globally. As Chinese e-commerce expands, so to will Alibaba, which will allow the company to engage in international investments. With a market cap that already exceeds that of Amazon by more than $115 billion, Alibaba has positioned itself to directly challenge Amazon's services catalogue, such as video and music streaming, game downloads, and cloud storage. Eventually, in addition to its American presence, this advantage may actually lead to an Amazon acquisition by Alibaba.
For Amazon, it may be time for its investors to slash CEO Jeff Bezos' spending frenzy. Bezos, who has openly admitted he is unconcerned with the company’s current bottom line, has spent millions investing in everything from book publishing to video game streaming. Unfortunately for Amazon investors, most of Bezos' investments have yet to turn a profit. The Amazon Fire smartphone was a complete flop, drone deliveries remain a distant fantasy, and same-day grocery delivery services are in their infant stages. Combine these projects with the fact that Amazon apparently sells Kindles at a loss, and you’re looking at a gloomy company outlook. Moreover, it appears the successful emergence of Alibaba has investors questioning Amazon's value more than ever. Nevertheless, hope remains for America’s favorite online retailer. If these investments eventually pay off, and Amazon discovers the perfect formula for tech, retail, and digital media, the result could be worth more than Amazon and Alibaba combined.
So which of the two scenarios is more likely? Although picking one is completely speculative, I think it is important for prospective investors to develop an educated opinion regarding these two companies. In doing so, you can create individual investment strategies. If Amazon continues to falter, and Alibaba continues to grow, what will stop the Chinese e-commerce giant from acquiring its largest competitor? Conversely, if Amazon finally surprises analysts with earnings beats, inspired by Bezos' long-term investments, could the company pose a real threat to Alibaba? Only time will tell, and as long-term investors, time is on our side.