Why Alibaba Can Expand Faster Than Amazon?

Alibaba (NYSE:BABA), the largest ecommerce player in China, is often compared to the U.S. online retail giant Amazon. However, Alibaba’s business model is more akin to that of eBay. It provides the technology infrastructure and marketing reach to businesses, enabling them to leverage the power of Internet and conduct their business online. Alibaba does not have any inventory of its own.  Amazon, on the other hand, primarily sells its own merchandise, in addition to providing a marketplace to other players. The retailer owns warehouses, stocks inventory and functions like any other retail player with an online store.  Therefore, we believe Alibaba’s business model is more nimble and could help it expand much faster compared to Amazon.

See our complete analysis for Alibaba.

Alibaba’s business model is not capital intensive

For their last reported financial years, Amazon (Dec 2014) and Alibaba (Mar 2015) both generated nearly $6 billion cash from operations. Amazon spent more than $4 billion of this cash in capital expenditure, which was primarily towards developing additional capacity for its operations. Of this, $500 million was spent towards internal use software and website development. Alibaba, on the other hand, spent only $769 million on capital expenditure last fiscal year. Since Alibaba’s capital expenditure is primarily on its technology platform, it is much lower than that of Amazon. Despite having a capital expenditure of less than a fourth of Amazon’s, Alibaba’s revenues jumped 45% last fiscal year as compared to Amazon’s 20% increase. This demonstrates the scalability of its business model. Also, higher cash from operations and a lower capex will help Alibaba create higher cash reserves for future growth and expansion.

International expansion is the key

Both Alibaba and Amazon are looking at international markets to expand – the former in the U.S. and the latter outside the U.S. We expect Amazon’s market share in the international sales (electronics and general merchandise) market to increase gradually from the current figure of 2% to around 3% at the end of the forecast period. During the same period, we expect Alibaba’s international retail revenue to increase by more than 6 times from current levels i.e. from 2 billion CNY to 12 billion CNY.

Alibaba commands nearly 80% of China’s e-commerce market, while Amazon’s has close to 30% share in the U.S. market. Amazon faces stiff competition in international markets and its capital intensive business makes it less profitable to expand in other regions. Although in regions like India, Amazon has the less capital intensive marketplace model, in other international markets it is replicating the retailer model. Amazon’s net margins are less than 1%, while Alibaba generates a net margin of more than 40% (as per the latest fiscal year annual reports). The adoption of Chinese products in global markets is increasing and Aliexpress – Alibaba’s international retail e-commerce site – is witnessing growth in the number of buyers from countries such as Russia, Brazil and the U.S. A strong cost advantage of Chinese products is attracting buyers from all over the world. As both players look to expand in other regions, Alibaba definitely has the edge in terms of a more scalable business, a stronger market share in its local region and increasing traction in international markets.

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