Let’s put two great e-commerce giants head-to-head and see how they measure up on the analyst recommendations – and then decide which one makes a better investment.
We’re talking Amazon.com, Inc. (AMZN – Research Report) and Alibaba Group (BABA – Research Report), of course: the giant in the world markets versus the giant in the world’s most populous country’s markets. According to The Economics Review at NYU, “These two companies have been – and continue to be – engaged in battle … to monopolize the e-commerce industry globally.” We’ll take a look at where that competition puts them in the equity markets.
Both stocks carry ‘Strong Buy’ consensus recommendations, both have a high upside potential, and both have been reviewed recently by the same group of 5-star market analysts. We’ll compare their comments on the outlook for both Amazon and Alibaba, to see which one boasts the highest endorsement.
Round One – How to Target Sales
Alibaba, Jack Ma’s online retail giant, has cornered the Chinese market, and skillfully taken advantage of China’s growing middle class to drive sales. While China’s ‘middle income’ sector is not as large as that in Western countries, the country’s sheer size – nearly 1.4 billion people – ensures that the middle class is a huge market.
Youssef Squali (Track Record & Ratings), of SunTrust Robinson, pointed this out back in November, after Alibaba posted record-breaking Singles’ Day sales numbers. “Alibaba’s report of 27% y/y increase in GMV to $30.8B (213.5B RMB) as the rising middle class in and around China more than offset the macro headwinds.”
Aside from the Singles’ Day sales numbers, his last note was perhaps the most important, hitting on the two factors that affect globally traded stocks in every Chinese company. First, that the Chinese middle class is driving a growing consumption sector, and second, that China’s economy is facing headwinds in the form of slowing overall growth. That said, he gave BABA shares a $180 price target, which is an 14% upside compared to the current share price of $158.
Where Alibaba is appealing to an increasingly important middle, Amazon is already there. The American company is shifting to a private label strategy (store brand, but by a different name) to both cut costs and increase margins. Squali noted this in his review of Amazon, when he said, “the rise of private labels and exclusives is one of the least understood / most under-appreciated trends.”
He took an upbeat outlook on revenue forecasts, predicting FY22’s revenue to increase from $25 billion to $31 billion powered by an expected 40% increase in private label sales. His price target for AMZN shares, $2,250, suggests a 37% upside to the stock.
For a working private label strategy, Amazon wins Squali’s recommendation, 37% to 14%.
Round Two – The Holiday Shopping Seasons
While the online retail giants operate in very different markets, Amazon and Alibaba both depend on annual holiday sales to boost the bottom line. For Amazon, that means the Black Friday to Cyber Monday weekend, launching the annual Christmas shopping season, while for Alibaba it’s Singles’ Day, the single largest online shopping day in China.
Colin Sebastian (Track Record & Ratings), of Baird, noted the importance of holiday sales to both companies in his reviews earlier this month. Of Amazon, Sebastian said, “…holiday e-commerce trends suggest an in-line Q4 for Amazon, which translates into revenue being at the high end of guidance.” He sees potential weaknesses in the form of macroeconomic softness in the UK (that’s Brexit, folks), increasing regulation in India, and changes to FBA and third-party fees. Overall, Sebastian gives greater weight to the positive factors, reflected in his $2,100 price target and 28% upside on AMZN shares.
By contrast, the analyst emphasized the weaknesses that he saw in Alibaba. Like Squali, he pointed out that China’s online sales are slowing and that growth, in the short term, is facing headwinds. Looking at raw numbers, Sebastian notes that Alibaba’s Singles’ Day GMV growth, year-over-year, was 27%. While impressive, that was still lower than last year’s 39% growth. At the same time, the total GMV was $31 billion, which compares favorably to total Cyber Monday sales in the US and to eBay’s annual sales totals. Alibaba may be slowing, but it is still going strong.
The combination of strength and weakness explains Sebastian’s outlook on BABA stock. He gives it a $178 price target, for a 12% upside.
Amazon again wins the recommendation, 28% to 12%.
Round Three – Looking Forward
Both companies are offering forward guidance for revenue expectations, in the near and medium term. Amazon’s Q4 FY2018 report and Alibaba’s Q3 FY2019 are due out at the end of this month, and market watchers will keep the usual close eye on the results.
Oppenheimer analyst Jason Helfstein (Track Record & Ratings) is optimistic about Amazon’s Q4. He expects to see the company exceed its estimated gross profits, even while international growth slows, and for the gap between Amazon’s profits and traditional brick& mortar retailers to continue to widen. Recognizing that the stock – and the company’s business model – are fundamentally sound, Helfstein gives AMZN a $2,020 price target and a 23% upside.
Turning to Alibaba, Helfstein updates his revenue estimates due to economic headwinds. While he expects the FY2019 numbers to show in line with expectations, he adds, “…expect softer F20E core commerce revenue, largely caused by slower consumption and eCommerce macro trends.” Once again, a slowing Chinese economy is expected to impact online sales. Helfstein still sees BABA as a healthy stock, however, able to weather difficult economic conditions. He gives it a $185 price target and a 16% upside.
For Round Three, the quarterly forecast, Amazon is once more the winner, with a 23% upside compared to 16%.
Summing Up
In the head-to-head, the competition was close, but Amazon wins all three rounds.
As we can see from these screenshots, both stocks have a ‘Strong Buy’ rating on the analyst consensus, and neither one has any ‘hold’ or ‘sell’ ratings – this was a comparison between two solid stocks, each with a lot of potential. The key to finding a winner lay in the analysts’ comments.
Enjoy Research Reports on the Stocks in this Article:
Alibaba Group (BABA) Research Report
Amazon.com, Inc. (AMZN) Research Report
We pulled the information for this article from each stock’s Price Target page. TipRanks collects and curates data on over 5000 listed stocks and makes summaries available for every stock in the database. You can use this information in a variety of ways, including comparing to companies head-to-head. Find Amazon’s price target here, and Alibaba’s here.
