Amazon & Alibaba – Pair trade?

Similar companies, different issues

• Amazon is going to suffer from all of the same problems that Alibaba has but is in a better position to mitigate the logistics impact.
• However, its demand picture is far less clear.
• With social distancing, isolation and closures becoming the norm, the role of e-commerce is going to become extremely important.

Alibaba

• In China, Alibaba saw a huge increase in demand but really struggled to fulfil most of its orders as its logistics arm (Cainiao Network) was running at just 20% of capacity.
• However, in the last few weeks, Cainaio has been able to return its network to full capacity in every Chinese region outside of Hubei province.
• Cainiao has also stated that package volumes have exceeded the levels that were seen at the same time in 2019 (on a daily run-rate basis).
• This means that Alibaba is going to post really bad Q1 2020 results but may well guide well for Q2 and beyond.
• In effect, China and the rest of the world have switched places and given that Alibaba has almost all of its revenues coming from the domestic market, its short-term outlook is far better than most.
• This means that consumer demand in China is likely to pick-up quite quickly as the country returns to some degree of normalcy.
• However, the problem that China has is that as only 80,000 out of 1.3bn people have had the disease, there is no immunity in the population which means that it will still have to be very careful until a vaccine can be found.
• This is likely to prove to be a boon for Alibaba as I think this will further move consumer demand online meaning that the recovery will disproportionately impact Alibaba.
• Alibaba is down 22% from its high in mid-January and may be starting to look interesting.

Amazon

• The advantage that Amazon has over Alibaba is that the current outbreak has not coincided with a national holiday (like Thanksgiving) where all its employees travel from their place of work and get back to return to work.
• This means that Amazon is not going to suffer from the problem where its logistics operation completely grinds to a halt.
• Furthermore, as many other industries shut down, there will be plenty of labour available to plug any gaps created by illness as well as respond to any big increase in demand from people shopping more online.
• The problem is that in a lock-down, consumers don’t spend on the kind of items that Amazon predominantly sells.
• Amazon owns Whole Foods but in terms of the entire grocery industry, this is pretty small.
• Amazon also owns PillPack but again this is a very small player at the moment in the US pharmacy industry.
• This means that while Amazon is not going to suffer a sales hit from not being able to fulfil orders, its demand picture is very unclear.
• Demand is currently sky high for groceries and pharmacy could well follow, but Amazon is not very exposed to these as a proportion of its overall revenues.
• Hence, it is likely to see more of the demand decline that is going to come from consumers spending months at home compared to China where things are gradually coming back to normal.
• The net result is that I am less confident in predicting Amazon than Alibaba.
• Amazon has also fallen by 22% (incredibly outperforming the wider market) but its valuation remains extremely high compared to Alibaba in an environment where the PE ratio is getting crushed.

Take-Home Message

• The net result is that the visibility on Alibaba, while not good, is better than it is for Amazon.
• This comes in a market where certainty and clarity are in very short supply meaning that they are more highly valued.
• Hence, I would prefer Alibaba over Amazon and there is the possibility of a pair trade if shorting remains possible.
• However, in this environment, rational investing is totally impossible, meaning that much as I would like to take a position in Alibaba, I am staying out at least until some degree of rationality returns.