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Sangara Narayanan
Sangara Narayanan
Articles (562) 

Alibaba Viewed in a New Light Still Exposes High Risk Levels

Comparing Alibaba with Amazon Web Services gives a new perspective on the risk involved

August 11, 2017 | About:

Alibaba’s (NYSE:BABA) growth has been phenomenal, to say the least. Similar to the way Amazon (NASDAQ:AMZN) kept rampaging through the U.S. retail market, Alibaba has done the same in the Chinese e-commerce market, and its No. 1 position in the world’s second-largest "e-conomy" looks unshakable despite increasing competition.

Revenue growth has accelerated during the last four quarters as Alibaba’s new revenue streams from cloud computing and digital media entertainment kept expanding, allowing Alibaba’s revenue to increase by more than 54% in the last four quarters. But the side effect of such growth is that the stock price has surged by 78% in one year, pushing Alibaba’s price-sales (P/S) multiple to a mind-boggling 16 times.

Now, this is where the problem begins. There is no doubt about Alibaba’s potential to improve its sales at double-digit rates for the next few years, but how much are we ready to pay for it? For comparison’s sake, Amazon, which has a much bigger and better cloud computing arm, trades at around 3 times sales.

One can easily argue that comparing Alibaba, which is more of a technology platform that facilitates sales, similar to a broker, to Amazon, which is actively involved in buying and selling goods, is just plain wrong. There is merit to that argument, but does that warrant Alibaba to be traded at nearly five times more than Amazon?

To make our comparison even simpler, let’s compare Alibaba’s total revenue and company valuation against just Amazon Web Services (AWS).

During the recent fourth quarter of 2017, which ended March 31, Alibaba reported net sales of $5.605 billion, a stunning growth of 60% compared to the prior period while revenue in the last four quarters was $22.994 billion.

During the second quarter of 2017, Amazon Web Services reported sales of $4.1 billion, registering a growth of 42% compared to the prior period. Alibaba's revenue grew above 54% in the last four quarters compared to AWS’s above 40% level.

AWS reported $14.53 billion sales in the last four quarters.

Now, if we assume 15 times sales, lower than Alibaba is commanding right now, then AWS would be worth in excess of $200 billion, accounting for nearly half of Amazon’s current market cap of $471 billion.

If Alibaba’s current valuation of $403 billion is fair, then it makes Amazon an extremely undervalued company. The recent growth spurt has pushed Alibaba’s stock price to stratospheric heights, leaving no margin of safety for investors. Don't chase Alibaba at these levels; wait for things to cool down. Amazon offers much better risk vs. reward for investors at this level.

Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.

About the author:

Sangara Narayanan
Sangara Narayanan holds an MBA from Kent State University, Ohio, and has worked on the floor as a trader in New York. You know where. He is passionate about capital markets and specializes in business analysis, stock valuations and making chicken curry

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