Why Alibaba Will Reach $1 Trillion Before Amazon – Seeking Alpha
Investors betting on the technology sector have done exceptionally well in the last 3 years, with the sector (NYSE:XLK) outperforming the broader market (NYSE:SPY) by 21%. The demographics of tech investors are skewed towards the younger generation. In fact, if you ask any investors under the age of 40, an overwhelming and unsurprising majority will tell you that they have one or more holdings in FAANG stocks (Facebook, Amazon, Amazon, Netflix, Google). The FAANG holdings make sense in because these are the companies that are dominating our everyday lives in the United States – from social networking, video/music content, retail spending, to all the advertising dollars associated with the above, Americans simply canâ€™t get enough FAANG.
As an investor from California in his early 30s who went to a tech â€œcoreâ€ school twice, regrettably missed the tech train due to my value investing training. In a previous article on my Millennial Income Portfolio, several commenters noted that a young investorâ€™s portfolio would benefit from a core of growth stocks with tax-deferred growth, so I decided to research the various tech giants to figure out which is the best long-term hold.
My quest led me to two of the most dominant and visible technology giants – Alibaba (NYSE:BABA) and Amazon (NASDAQ:AMZN). Between the two, I believe Alibaba has a longer growth runway and has a good chance to hit $1 trillion in market cap before Amazon. Here are my top five reasons why.
1. Alibaba is Under-owned by ETFs and Active Managers
Amazon as a stock is broadly owned by passive and active funds. On the mutual fund side, it is owned by technology funds, momentum funds, growth funds, large-cap funds; on the passive side, Amazon can be found at the top of the holdings list for ETFs of all flavors, including technology, growth, consumer discretionary/staples, large cap, infrastructure, etc. Of course, Amazon is also a key component of giant market cap-weight funds such as S&P 500 ETFs (SPY).
Alibaba, on the other hand, is severely under-owned by ETFs, despite trading on the NYSE and having a market cap comparable to Amazon. In fact, BABA isnâ€™t even included in the S&P 500!
As you can see from the top holders list above, Amazonâ€™s top owners are fund/ETF shops such as Vanguard, Blackrock/iShares, FMR/Fidelity, State Street/SPY, Invesco/PowerShares, while the same companiesâ€™ Alibaba holding is only a small fracture of their Amazon positions.
2. Alibaba Enjoys More Favorable Demographics
I think we can all agree that the U.S. is by far Amazonâ€™s main market, while China is Alibabaâ€™s turf. China as a growth story is already a broken drum so I will not repeat the story too much.
We know China as a market has 4 times as many people as the U.S:
We also know that an Alibaba customer in China is not worth as much an Amazon client in the States. In fact, per capita income in the U.S. is almost 6 times higher than Chinaâ€™s. However, China is undergoing a rapid urbanization, and income in its top-tier cities such as Beijing and Shenzhen is accelerating quick. Many classmates in my MBA class have opted to work in China because salary at globally-renown Chinese firms such as Tencent (OTCPK:TCEHY) and JD.com (NASDAQ:JD) already exceeded that of top American firms.
Chinaâ€™s urban areas currently account for just 57% of the population, versus 83% for the U.S. China still has many years of rapid income growth in the years ahead. A quick back-of-the envelope calculation shows Alibabaâ€™s market is 4 times as big as Amazonâ€™s, while its customers spend only a third as much. Ceteris paribus, Alibaba should be 33% bigger than Amazon. This is not counting growth from the fast-growing ASEAN markets, where Alibaba has a bigger presence than Amazon.
3. E-commerce is Much More Proliferate in China
Amazon is well-known by Americans as having their hands in many of consumer spending cookie jars. They are our top choice to buy everything from books, electronics, to razor blades, and now even groceries. What investors are not aware of is that e-commerce is more proliferate in China than the U.S
E-commerce accounts for 15.5% of total retail sales in China, and only 9% in the U.S:
Source: eCommerce Worldwide
4. Alibaba is Much More Dominant in its Home Market
Believe it or not, Chinese consumersâ€™ dependence on Alibaba is actually stronger than our addiction to Amazon.
Alibabaâ€™s TMall owns half of Chinaâ€™s B2C e-commerce pie –
Alibaba is also the unquestioned leader in mobile shopping –
While Amazon, albeit with growing market share, â€œonlyâ€ accounts for less than half of U.S. e-commerce:
5. Alibaba Has More Diverse, Ubiquitous Business Lines
While Amazon has two secret weapons that everybody knows of – Amazon Web Service (AWS), the backbone of our internet, and its unrivaled logistics infrastructure on the ground â€“ Alibaba has a similar service in China and then some.
Remember when it was pretty cool when you discovered that Amazon owns IMDB and AWS is the cloud service provider for many websites? Itâ€™s even more impressive now that we can even have organic avocados delivered to us from the same company. Well, Alibaba is another Amazon on the other side of the globe, except it also owns the equivalents of YouTube, Yelp, OpenTable, PayPal/Venmo in China.
I will save the Alipay/Ant Financial piece for another article, but it is important to note that Alipay, Alibabaâ€™s 3rd party payment service under its Ant Financial subsidiary, is already the preferred payment method in China. A good portion of offline transactions in China are already cashless and being paid through Alipay, through which Alibaba collects a nice interchange fee of up to 0.6%. Alipayâ€™s market share is about 70%, while its top competitor TenPay (backed by Tencent) holds about 25%.
Alibabaâ€™s Ant Financial arm also runs “Yu E Bao” (pronounced YU-UH-BOW), the biggest money market fund in the world at ~ $170 billion USD, that is linked to most Alibaba shopperâ€™s accounts.
With a much larger and faster-growing target market in Asia and all-encompassing business lines that stands to benefit directly from rapidly increasing disposable income, Alibaba is poised to grow much faster than Amazon. As China continues to liberalize its capital markets, Chinese equities will warrant increasing larger allocation of investor capital and Chinaâ€™s share of global market cap (10%) will converge with its share of global GDP (15%). Alibaba is already well-liked by the market now, but it certainly deserves more love.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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