Is Alibaba The Better Buy Over Amazon?
I’m a numbers man, massaging corporate income statements and balance sheets over some 60 years. Numbers, not headmen’s rhetoric, tell the story. They sing as in Amazon AMZN , Apple AAPL and Alibaba BABA or don’t sing as in Macy’s M , General Electric GE , even Exxon Mobil XOM , a polite disaster facing a dividend schmeiss next year.
I can look at a corporate balance sheet for 60 seconds and tell you whether it’s undercapitalized, overcapitalized or even precariously perched for a bankruptcy filing within 12 months if numbers don’t wax better.
One of the great circle jerks on the Street is the quarterly management-guidance séance for analysts. Managements today are smart enough only to hand hold their constituency up to the point of projecting next quarter’s numbers within a narrow range.
Jeff Bezos at Amazon does this with gusto. Bezos never projects Amazon earning more money in the coming quarter than in the past quarter or that revenues grow much at all. Such nonsense ensures analyst projections for revenues and earnings never match reality. The company then attains an upside numbers surprise, worth its weight in gold.
Nobody ever gets his numbers right on near trillion to $2 trillion market capitalizations. Start with Apple and work down to Microsoft MSFT , Amazon, Alphabet, even Facebook and then Alibaba. The great irony in the bull market for technology paper is that nobody can sharp-pencil earnings numbers or even build a credible income model that goes out three to five years.
As such stocks levitate, say 300% over five years, everyone gradually discards his earnings per share model and deals rather with multiples of revenues, multipliers of Ebitda or in my case operating cash flow. My focus on operating cash flow is that at least this is the wherewithal available to management for building out their core competences.
I use the multiple of free cash flow yield too, for the same reason. Free cash flow yields ranging from 5% to 10% comfort me in my picks. In Facebook’s case, I’m amazed by their research spend which approximates 20% of revenues. But, they tell you nothing about research priorities so it’s a raw stat.
Balance sheets are useless except for projecting how much stock the company in question could buy back. This was an important consideration in analyzing Apple, with its colossal-redundant capital, but not so usable for Amazon, Facebook and Alibaba. In Alibaba’s case, they are losing, perennially, billions covering initiatives in cloud computing and the entertainment sector with no hint on future profitability.
They tell us nothing about their 31% holding in Ant Financial which is a Far-Eastern octopus in the making – covering money management, credit cards and automated payments by consumers. Next five years, I see Ant built out and capitalized by the market at over $500 billion, maybe equivalent to the present market cap of Alibaba’s $600 billion.
When reading Alibaba’s quarterly reports, first thing that strikes me is +sheer magnitude of its consumer franchise. I remember being wowed by Polaroid’s and Xerox’s XRX franchises expressed in volumetric revenue growth, operating profit enhancement and bottom-line earnings. This was 60 years ago and competing technologies practically destroyed the sixties growthies over a span of under five years, not decades. Diversification initiatives proved stillborn.
Catch this bunch of Alibaba numbers: Quarterly revenues up 34%. There are 874 million mobile active users, up 28 million year-over-year. Operating income plus 42% and Ebitda up 30%. Non-GAAP net up 28% to $5.6 billion and non-GAAP free cash flow at $5.2 billion. Operating cash flow at a $7 billion quarterly run rate. Earnings per share plus 18%. They are still losing billions in cloud computing and entertainment initiatives. Using my shorthand, I’d put annualized operating cash flow conservatively at $30 billion. Alibaba justifies its $600 billion market value.
Dissecting Amazon’s operating cash flow we see latest 12 months’ numbers rose 42% to $51.2 billion. On my horseback numbers, Amazon sells at 25 times forward 12 months’ operating cash flow, more pricey than Alibaba, but it controls a hugely profitable cloud-computing division and carries a foreign revenue base approximating $100 billion that as yet earns zilch. For how long do you sacrifice gross margins, building your footprint? Jeff Bezos tells us nothing. You need a 25 multiplier on forward-operating cash flow to rationalize Amazon’s current price.
I’m OK with such valuation metrics but I own more Alibaba than Amazon. Net, net, it’s a cheaper piece of paper. So far, easier to follow, quarter over quarter. Amazon carries a $1.5 trillion market capitalization, equivalent to Microsoft, but still a guessing game, analytically speaking.
Maybe, I should move to Hong Kong, buy a bunch of Ant Financial, then watch them build out their franchise next five years.
There’s one last way of comparing Alibaba to Amazon. Forget about per-share numbers, but look at the sheer magnitude of their business footprints in e-commerce and cloud computing.
Surprised by what I found. In cloud computing, Amazon has built out a major presence. Amazon Web Services is now importantly profitable. June quarter’s run rate for revenues was $10.8 billion with operating income rising over 50% to $3.3 billion, a serious number. For Alibaba, a late cloud arrival, we still see red ink. Revenues here latest quarter at $1.7 billion, but still losing money. It’s big in China, but nowhere else a worldwide contender.
In e-commerce, the story flip-flops. Amazon’s revenue run rate in North America has surged to the $200 billion level with operating income now running at $8 billion. The international sector, approaching a $100 billion revenue base, turned profitable in the June quarter. Maybe, we’re looking at a forward run rate over $1 billion, annually.
Alibaba’s e-commerce footprint remains awesome in magnitude and profitability. Annual-active consumers in China reached 874 million at midyear, the base still growing. Revenues up 34% June quarter, look like an annual run rate approaching $100 billion with operating income north of $20 billion, maybe $25 billion for non-GAAP net income.
So Alibaba boasts a sizable, consistent earnings footprint in e-commerce, weighing in at $25 billion. Amazon, benefiting from shut-in consumers maybe at an $8 billion level. Boiled down, I’d construe Alibaba remains the premier world e-commerce operator. Amazon today is more of a cloud-computer contender with an e-commerce sector that needed Covid-19 to turn much more than marginally profitable.
Down the road, Alibaba’s Ant Financial investment could become the tail wagging the dog on asset-enhancement valuation. Alibaba is easier to model and probably a better investment but not by a wide margin. Own ‘em both in a two-for-one ratio favoring Alibaba unless you think the Chinese economy turns into a burned-out case.
Actually, as a stock past five years, Amazon left Alibaba in the dust.
Sosnoff and / or his managed accounts own: Alibaba, Amazon, Apple, Facebook and Microsoft.