Amazon vs. Alibaba – The Baba vote.

Things look much better for Alibaba.

• While demand is softening all over the world, Alibaba has pretty much priced in a pessimistic outlook but is starting to see a turn in sentiment while Amazon’s valuation remains very high and all the signs are pointing towards worse to come.
• At its Q1 2022 results, Amazon admitted that it had overbuilt capacity and was looking to slow it down, but the scale of the slowdown has surprised me meaning that there may be further downside to estimates.
• No less than 16 facilities in the USA alone (see here) have seen capacity expansion curtailment or cancellation, and I suspect that one could find more if one looked overseas.
• Hence, I suspect that we have not seen a bottoming of expectations and that when Amazon reports once again to the market, it may have more bad news to impart.
• On the other hand, Alibaba has had nothing but bad news to impart for over 2 years.
• A single slip of the tongue by its founder Jack Ma triggered a brutal wave of regulation that led to the cancellation of one of the biggest IPOs ever and a loss of well over $1tn in market value in Chinese technology.
• Combine this with the savage lockdowns triggered by the Covid zero policy of the Chinese government, and it has not hard to see why the outlook and sentiment for Alibaba have been so bad.
• However, I think that the worst is over in China as the state has realised that killing its technology sector will not help it in its quest to become the preeminent technology power in the world.
• It has successfully reminded its upstart billionaires who is in charge in China and can now go back to supporting Chinese technology.
• This is why there has been a significant softening of its rhetoric and we have seen moves to actually support the technology sector rather than hinder it.
• Furthermore, China still has some fiscal weapons in its arsenal, unlike the West.
• Inflation in China is still far lower and, with interest rates at 4%, there is scope for the People’s Bank of China to cut rates in order to stimulate its economy when it finally realises that Covid zero is impractical and is keeping a lid on the economy.
• There are also signs that sentiment towards Chinese technology stocks has bottomed as many of them are orders of magnitude cheaper than their Western counterparts while their outlook has bottomed and is starting to improve slightly.
• Amazon is trading on 42.9x 2023 PER while Alibaba is on 22.6x 2023 PER on my very conservative estimates for Alibaba.
• With risks to earnings rising faster in Western markets than in China (as they have already tanked), the risk-reward for Alibaba over Amazon remains as strong as ever.
• This is why I continue to hold it and why I think it will perform much better than Amazon over the next 2 to 3 years.
• I missed Amazon on the way up and I have no intention of participating on the way down.