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The e-commerce industry’s immense growth potential—with the expectation that people will stick with online shopping even after the pandemic—has made the key industry players ideal picks for renowned investor Cathie Wood’s ETFs. Amazon.com (AMZN) and Alibaba Group Holding (BABA) are two of her biggest bets in this industry. But which company is expected to deliver better returns? Continue reading to find out.
Amazon.com, Inc. (AMZN) and Alibaba Group Holding Limited (BABA) are two of the world’s largest e-commerce platforms, as well as two of the most valued companies globally. AMZN and BABA together dominate online global sales volume and are two of the most profitable companies in this industry. And because the popularity of the e-commerce industry is expected to continue increasing even as COVID-19 pandemic retreats, we think the two companies still have immense upside.
The industry tailwinds and promising outlook make both stocks ideal investment bets for Cathie Wood. She holds approximately 19,800 shares of AMZN, which translates to a 0.15% weighting across ARKX and ARKF. The stock has a #117 weighted rank across both the funds. She owns some 630,989 shares of BABA, which equates to a 0.32% weighting across ARKX, ARKF and ARKQ. BABA is ranked #75 across all Ark funds.
AMZN has gained 41.1% over the past year, while BABA returned 16.3% over this period. In addition, AMZN shares have gained marginally year-to-date, while BABA’s shares declined by 2.6%. In terms of their past month’s performance, AMZN is the clear winner with 1.4% returns versus BABA’s 0.7% gains. But which of these two stocks is a better buy now? Let’s find out.
Click here to check out our E-commerce Industry Report for 2021
On April 27, AMZN extended in-garage grocery delivery to Amazon Prime users in more than 5,000 cities in the U.S. . With online grocery shopping increasingly replacing traditional in-store shopping due to its efficiency, AMZN’s newly introduced services are expected to be a big hit.
The company has been expanding its cloud computing services periodically over the past couple of months, making Amazon Web Services one of the biggest cloud providers worldwide. AWS launches new software integration and updates nearly every day, making it one of the most used software worldwide.
Earlier in February, AMZN’s founder Jeff Bezos stepped down as CEO to become an executive chairman of the board. He was replaced by Andy Jassy, formerly the CEO of AWS. Bezos has sold roughly $2 billion worth AMZN shares over the past week. This follows the former CEO’s sales of nearly $7.10 billion worth shares last year. However, Bezos previously stated that he is reducing his stake at AMZN to fund his space exploration company.
Following BABA’s lengthy antitrust proceedings, the e-commerce giant was fined $2.8 billion by the Chinese federal government for engaging in monopolistic behavior. The company is currently raising $5 billion through multiple unsecured senior note offerings, which should allow it to offset the loss incurred from fine. BABA also plans to use the proceeds of the note offerings to repay offshore debt and to meet potential acquisition expenses, along with financing its day-to-day operations.
Recent Financial Results
AMZN’s revenues increased 44% year-over-year to $108.50 billion in the first quarter, ended March 31. Its operating income rose 122.5% from the same period last year to $8.90 billion, while its net income improved 224% from its year-ago value to $8.10 billion. Its EPS came in at $15.79, representing a 215.2% increase from the prior year quarter.
For the fourth quarter ended December 31, BABA’s top line stood at $33.88 billion, up 37% year-over-year. Its income from operations improved 24% from the prior year quarter to $7.51 billion. Its non-GAAP EBITDA came in at $10.48 billion, indicating a 22% rise from the same period last year. And its non-GAAP net income and earnings per ADS increased 27% and 21%, respectively, year-over-year to $9.07 billion and $3.38.
Past and Expected Financial Performance
AMZN’s revenues increased at a 29.5% CAGR over the past three years. Its net income rose at an 89.8% CAGR over the past three years, while its EPS improved at an 87.7% CAGR over this period. The company’s levered free cash flow increased at a 53.5% CAGR over the past three years.
In comparison, BABA’s revenues improved at a 41.6% CAGR over the past three years, while its levered free cash flow rose at a 23.5% CAGR over this period. The company’s net income and earnings increased at 33.4% and 31% CAGRs, respectively, over the past three years.
The Street expects AMZN’s EPS to rise 3.2% in the second quarter (ending June 2021), 33.1% in the current year, and 29.2% next year. Consensus revenue estimates indicate a 23.5% improvement in the current quarter, 27.1% rise in the current year, and 18.6% rise in fiscal 2022.
Analysts expect BABA’s EPS to rise 18.6% in the current quarter, 24.1% in its fiscal year 2021, and 9.3% next year. BABA’s revenue is expected to rise 39.4% in the current year, and 30.9% next year.
In addition, both companies have impressive earnings surprise histories; they beat the Street’s EPS estimates in each of the trailing four quarters.
AMZN’s trailing-12-month revenue is 4.25 times BABA’s. However, BABA is more profitable, with a 43.25% gross margin, compared to AMZN’s 40.48%. BABA’s net income margin and levered free cash flow margin of 24.71% and 27.85%, respectively, are significantly higher than AMZN’s 6.42% and 7.49%.
However, AMZN’s ROE, ROA and ROTC of 31.91%, 6.84% and 10.69%, respectively, compare favorably with BABA’s respective values.
In terms of non-GAAP forward price-to-earnings, AMZN is currently trading at 60.51x, 173.2% higher than BABA’s 22.15x. AMZN is also more expensive in terms of non-GAAP forward PEG ratio (1.80 vs 1.18), and trailing-12-month price/cash flow ratio (24.85 vs 19.23).
But BABA’s 6.22 trailing-12-month price/sales multiple is 57.1% higher than AMZN’s 3.96.
Both AMZN and BABA have overall C ratings, which equate to Neutral in our proprietary POWR Ratings system. The POWR Ratings assesses stocks by 118 different factors, each with its own weighting.
Both companies have a B grade for Quality, which is justified by their higher-than-industry profit margins. However, AMZN has a Sentiment grade of A, while BABA has a Sentiment grade of C. This is justified because AMZN’s growth potential is slightly higher than BABA’s. Both the stocks have a C grade for Value, owing to their premium valuations.
Of the 71 stocks in the F-rated Internet industry, AMZN is ranked #11. In addition to the grades we’ve highlighted, one can view AMZN’s Ratings for Stability, Momentum and Growth here.
BABA is ranked #19 of 78 stocks in the D-rated China group. Click here to view additional ratings for BABA (Stability, Momentum and Growth).
BABA’s recent antitrust fine has put a dent in its balance sheet. This, combined with more higher debt issuance, is expected to reduce the company’s earnings and ROE in the coming months.
On the other hand, AMZN still faces antitrust allegations by the U.S. government and European Union. Also, the company’s recent management change creates some uncertainty regarding the company’s performance because Bezos has been key to AMZN’s success so far.
Considering these events, we think investors should wait until both the companies stabilize before investing their stocks.
Our research shows that the odds of success increase if you bet on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to view the top-rated stocks in the China group. Also, check out the highly rated stocks in the Internet industry here.
Click here to check out our E-commerce Industry Report for 2021
AMZN shares were trading at $3,306.88 per share on Thursday afternoon, up $36.34 (+1.11%). Year-to-date, AMZN has gained 1.53%, versus a 11.90% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditi Ganguly
Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don’ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.
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