The Alibaba Holding Group (NYSE: BABA) is one of the biggest success stories in online retail. Alibaba reported quarterly revenues of $16.815 billion and a quarterly gross profit of $7.589 billion on 30 June 2019, for example.
Astonishingly, Statista estimates Alibaba’s platforms had 674 million active online consumers in 2nd Quarter 2019. Remarkably, that number grew from 576 million consumers in 2nd Quarter 2018 and 279 million active customers in 2nd Quarter 2014.
In contrast, there were 2.63 billion visits to Amazon (NASDAQ: AMZN) between February 2018 and 2019, Hostsorter estimates. Unfortunately, the most recent active account estimate I could for Amazon is from 1st Quarter 2016. Statista estimates Amazon had 310 million active customers four years ago.
Amazon vs. Alibaba
Alibaba’s numbers are impressive but small when compared to Amazon. Amazon reported quarterly revenues of $63.404 billion and a quarterly gross profit of $27.067 billion on 30 June 2019, for instance.
Thus, Alibaba’s quarterly revenues are less than a third the size of Amazon’s. However, I think Alibaba still makes impressive amounts of money. In particular, Stockrow gives Alibaba an operating income of $3.603 billion and a net income comparison of $3.109 billion for the quarter ending on 30 June 2019.
Interestingly, Alibaba’s income numbers are similar to Amazon’s. On 30 June 2019, Stockrow gives Amazon a quarterly net of $2.625 billion and an operating income of $3.084 billion. Hence, Alibaba’s income was slightly larger than Amazon’s income.
Alibaba is a cash-rich company. Stockrow gave BABA an operating cash flow of $5.064 billion and a financing cash flow of $657 million on June 30, 2019. However, there is no free cash flow for that date. I think that omission reflects Chinese accounting requirements.
Meanwhile Stockrow reports Amazon had an operating cash flow of $9.118 billion and a free cash flow of $6.475 billion on the same date. However, Amazon had a negative financing cash flow of -$2.158 billion on that day.
Impressively, Alibaba reported $33.190 billion in cash and short-term investments on 30 June 2019, Stockrow notes. Amazon reported $41.463 billion in cash and short-term investments on the same day.
Is Alibaba a better investment than Amazon?
Thus both Alibaba (NYSE: BABA) and Amazon (NASDAQ: AMZN) are cash-rich companies.
Additionally, both e-commerce giants are growing fast. Amazon had a revenue growth rate of 19.89% for the quarter ending on June 30, 2019. Meanwhile, Alibaba had a revenue growth rate of 34.08% for the same period, Stockrow estimates.
Hence, Alibaba is the faster growing company but which is the better investment? Alibaba is cheaper its shares were trading at $165.78 on 1 October 2019. In contrast, Amazon was trading at $1,744.29 on the same day.
I think Alibaba is the better growth stock because of its faster rate of growth and lower price. However, Amazon could be safer because the Everything Store is based in a country with more stability.
Is Amazon Safer than Alibaba?
To explain, Amazon is based in a democracy; the United States, and Alibaba in an authoritarian country with a Leninist dictatorship; The People’s Republic of China. Historically, Leninist dictatorships are less stable than democracies.
The United States has had the same political system for 230 years while, the most famous Leninist state; the Soviet Union, collapsed completely after 75 years. Interestingly, the People’s Republic of China: which Mao based on Lenin’s USSR, is 70 years old.
Note: I do not think Leninism means Communism. Instead, Leninism is the political structure, V.I. Lenin created to govern the Soviet Union. I think recent Chinese history shows Leninism works better with capitalism than socialism. Notably, China is experiencing far more economic growth than the USSR ever did.
Amazon; however, is still subject to political pressures. American politicians on both sides of the political spectrum propose antitrust action to break the Everything Store up.
On the right, President Donald J. Trump’s (R-New York) administration is conducting antitrust probes of Amazon and other companies, Fox Business speculates. On the left, Trump’s most probable Democratic challenger in next year’s presidential race, U.S. Senator Liz Warren (D-Massachusetts) promises to break up Amazon in a Medium post.
Can Alibaba Profit from Amazon’s Woes?
Thus, Amazon faces an unfriendly political climate and government. Meanwhile, Alibaba appears to have a supportive regime and friendly political climate in Beijing.
In particular, the Everything Store faces politicians who need scapegoats for growing income inequality and technological unemployment. A growing and controversial e-commerce giant headed by the world’s richest man makes a great scapegoat for both right and left.
Alibaba could profit from Amazon’s woes by buying operations antitrust regulators force Amazon to sell. Alibaba could buy Amazon Web Services (AWS); or Amazon Prime Video, if antitrust regulators force Amazon to sell those assets. In addition, Alibaba could find itself with more cash than Amazon. I think that will make Alibaba more competitive.
For example, Alibaba will have more money to finance expansion with. In particular, Alibaba will be in a better position to expand into developing markets like Africa. Plus, Alibaba could invest some of that money in American e-commerce companies like Walmart (NYSE: WMT), Wayfair (NYSE: W), eBay (NASDAQ: EBAY).
Can Alibaba cash in on Cryptocurrency?
Intriguingly, some Chinese government institutions could help Alibaba grow faster.
Alibaba could test a cryptocurrency being developed by the People’s Bank of China (PBOC), Forbes staff member Michael del Castillo claims. del Castillo speculates that the PBOC could test an altcoin called Digital Currency/Electronic Payments (DC/EP) as early as 11 November 2019.
Moreover, the PBOC could launch on DC/EP on 11 November 2019, del Castillo speculates. November 11 is Singles Day, the busiest Chinese shopping day in China. Unfortunately, del Castillo’s claims are based on anonymous “sources” so we have no way of verifying them.
Importantly, the People’s Bank of China is China’s central bank, equivalent to the Bank of England in the UK, or the Federal Reserve in the USA. Thus, Alibaba could be the first e-commerce company to test a central-bank issued cryptocurrency.
Can Alibaba Cash in on Project Libra?
Hence, Alibaba could soon gain valuable experience with cryptocurrency payment. That could help Alibaba cash in on Facebook’s (NASDAQ: FB) Project Libra scheme. To explain, Project Libra plans to issue a global cryptocurrency it calls the Libra.
If Project Libra works as advertised, people all over the world could use Libra to buy and sell through WhatsApp and Facebook messenger. Importantly, del Castillo claims Tencent Holdings (OTCMRKTS: TCEHY) owner of the fifth largest social media network.
Thus, Alibaba could gain experience selling items for cryptocurrency through one of the world’s largest social media platforms. I think Alibaba could leverage that experience to sell through Facebook, Facebook Messenger, Instagram, and WhatsApp. That could put Alibaba’s merchandise before the largest audience in human history.
In July 2019, Statista estimated Facebook had 2.375 billion users WhatsApp had 1.6 billion users, Facebook Messenger had 1.3 million users, and Instagram had one billion users. Hence, I estimate Facebook’s empire had 6.635 billion users in July 2019. Therefore, Facebook’s social media could reach most of the world’s population. World-O-Meters estimates the world had a population of 7.7 billion people in September 2019.
Hence, Alibaba could maintain its high growth rate for the foreseeable future and build the largest e-commerce platform ever through Libra, DC/EP, and other cryptocurrencies.
Is Alibaba a Value Investment?
Thus, I consider Alibaba (NYSE: BABA) a good speculative growth investment in e-commerce. However, I do not consider Alibaba a value investment.
Alibaba is not a value investment because it pays no dividend and offers no income to shareholders. Thus, the only money you could make from Alibaba is the theoretical profit from future sales of its stock. Like Amazon, which also pays no dividend, Alibaba is a speculative investment.
Only persons who can afford to take risks and do not need income now should buy Amazon (NASDAQ: AMZN) and Alibaba. Hence, I advise average people to stay away from these e-commerce giants until they pay dividends.
Originally published at https://marketmadhouse.com on October 1, 2019.