According to the Chinese government's official website: "China has announced that it will downgrade COVID-19 management from 8 January, treating it as a Class B infection rather than the more serious Class A." It appears that these may be the first factors leading to increased demand from the middle country's citizens. If this is the case, does the largest e-commerce retailer Alibaba (Alibaba) have a chance to reverse its downward trend of shares, which have fallen more than 71% since their peaks, and will it win this over its biggest US competitor Amazon (Amazon)?
A few words about Alibaba
Alibaba Group Holding Limited is a Chinese holding company based in Hangzhou, engaged in e-commerce and technology services. The company was founded in 1999 and is now one of the world's largest e-commerce platforms, offering a wide range of products and services to individual and business customers. Alibaba Group includes a number of entities, such as e-commerce platforms Alibaba.com and Taobao, as well as electronic payment service Alipay. Alibaba Group is also involved in the development of new technologies such as artificial intelligence and the internet of things. It is also active in the media and entertainment sector. The company is listed on the Hong Kong and New York stock exchanges.
Source: Conotoxia MT5, Alibaba, Weekly
Alibaba's business model is mainly based on online retail and wholesale. The company acts as a platform that connects buyers and sellers by offering them the tools to conduct online transactions. Alibaba also offers a wide range of services to sellers, including marketing and logistics consulting, as well as payment services through its Alipay platform.
The company makes money from commissions on transactions made on its platforms and fees for the use of its tools and services. Alibaba also earns money from advertising to sellers and buyers.
What are the differences between Alibaba and Amazon?
Amazon and Alibaba are both large international e-commerce platforms, but Amazon, unlike Alibaba, offers its own products and services such as Amazon Prime, which offers same-day delivery and access to streaming content. Amazon operates mainly in the US, although it also has large market shares in other countries: including the UK and Germany.
Source: Conotoxia MT5, Amazon, Weekly
Alibaba's main focus is on wholesale and is mainly aimed at Asian sellers. It also provides a wide range of tools and services for sellers.
Let's look at the financial results
Alibaba's results show a slowdown in the market. The giant's revenue fell 6.5% year-on-year in Q3 to US$29 billion. This compares to Amazon's sales growth of 14.7% year-on-year. However, things change when looking at the companies' operating results. Alibaba's operating profit rose by as much as 51% year-on-year, while for Amazon it fell by 47% year-on-year. This seems to be an escalating trend for the Silicon Valley giant.
Looking at the net profit margin for both companies, we could draw conclusions about the extent of the problems associated with the global slowdown. Alibaba's margin currently stands at a mere 1.8%, and we can see a continuous decline since 2020 of this value, from as much as 32%. Amazon seems to be more competitive in this field, having a margin of 2.25%. However, this is still a noticeable decline from 7% in 2021.
The worst performing of these companies appears to be return on equity ROE. It currently stands at 4.3% for the Chinese company (down from 13% q/q). Amazon's ROE is 23% and seems to fluctuate more or less around this value. This could mean that Amazon is making much better use of its resources and is able to pass on costs to the end consumer, which could mean a competitive advantage against the industry.
We could conclude that without a dramatic increase in Chinese demand, which could be caused by the end of the “zero-COVID” policy, it would be hard to see a change in the American lion's advantage over the Chinese dragon. Overall, however, the environment and the current economic situation do not seem favourable for companies in this industry, regardless of their pedigree.
Grzegorz Dróżdż, Junior Market Analyst of Conotoxia Ltd. (Conotoxia investment service)
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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