Amazon’s Stock May Continue To Outperform Alibaba’s
Alibaba Group Holdings (BABA) shares have not had a strong start to 2018, shares have not had a strong start to 2018, with shares rising around 4 percent, while Amazon.com Inc.Shares of (AMZN) have risen almost 30 percent.
Analysts are looking for substantial revenue and profit growth for both companies in the coming years. And with Alibaba’s stocks at about 73 percent to Amazon’s 78 percent increase over the past 52 weeks, one has to wonder why Alibaba has stalled in 2018, while Amazon has taken off.
Alibaba’s problem probably lies in its deteriorating margins, and Amazon’s success probably stems from its improving margins. If this recent trend becomes longer-term, it may also indicate that Amazon’s shares will outperform Alibaba in the coming years.
Alibaba’s gross margins have been declining since 2014, when they stood at nearly 77 percent. They have fallen to 57 percent from their latest quarterly results, a drop of 20 percentage points.
In contrast, Amazon’s gross margins have been steadily improving despite being lower than Alibaba’s. for the December quarter of 2017, Amazon reported gross margins of about 36 percent. But those margins have steadily increased, rising by nearly ten percentage points since 2014, when they were 26 percent.
Improving margins for Amazon is a path to better profitability, even if the pace of revenue slows. For Alibaba, it means that profit growth will steadily decline or you will have to find new ways to increase revenue at a faster pace. (See more: What are the differences between gross profit and gross margin?)
Alibaba’s slow profit growth
Looking more closely at analysts ‘ estimates, we see that revenue for Alibaba is expected to increase 70 percent in fiscal 2018 to fiscal 39.09 billion, while rising to $ 70.20 billion by the year 2020.
That’s a compound annual growth rate (CAGR) of 45 percent. Meanwhile, analysts are looking for earnings to grow at a CAGR of nearly 36.5 percent, to $ 8.65 during the three-year period beginning in 2017. With expectations that revenue will grow at a much faster pace than earnings, it seems analysts are considering further margin erosion in the coming years.
Amazon’s fastest profit growth
Amazon is quite the opposite, with earnings expected to rise from $ 4.55 in 2017 to $ 27.98 in 2020, a CAGR of nearly 83 percent. Meanwhile, revenue is expected to rise from 1 177.87 billion in 2017 to $ 339.93 billion in 2020, a CAGR of just 24 percent. In this case, analysts are considering better margins in the future for Amazon.
If Alibaba can show investors that it can increase margins, then maybe the stock can play a game of catching up with Amazon. Similarly, for Amazon, signs of margin erosion would likely hurt the stock’s performance.
At their current growth rate, both stocks are likely to continue to perform well; it’s just that Amazon can perform better.