The e-commerce giants Amazon (NASDAQ: AMZN) and Alibaba (NYSE: BABA) both saw massive growth during the pandemic, but that has now come to an end. After the reopening, consumers got back on the road, and the economic downturn also impacted growth. In a sense, the slowdown was predictable; the number of new people turning to e-commerce due to stay-at-home mandates was expected to decline as normalcy returned.
However, the two companies also faced other headwinds. The pair has invested heavily for the future, which has hurt its profitability. Both are also facing increasing scrutiny from regulators, though this is currently a bigger issue for Alibaba, watched by Chinese authorities. Not to mention that inflation has also played a role in reducing consumer spending.
All of the above has also impacted stock performance, with both down more than 20% year-to-date. This brings us to the main question: which of these giants represents a better investment choice at the moment? Let’s check with the TipRanks database to see what analysts think of their prospects.
Amazon started out as an online bookseller in the mid-1990s, when the internet was still in its infancy. With founder Jeff Bezos’ clever idea, the company quickly grew beyond a bookstore into an e-commerce force. However, that was just the beginning; Since then, Amazon has branched out in every direction – from cloud services with AWS to entertainment with Prime Video to smart home devices, groceries and logistics. We could go on – you name it, Amazon probably got their hands on it.
Online retail may be considered Amazon’s strong suit, but as the segment’s growth has taken a break, its higher-margin cloud business has grown at a rapid pace.
In the second quarter, Amazon generated $121 billion in revenue, up 7% year-over-year (10% excluding FX) while beating Street’s $119 billion forecast . AWS revenue grew 33% year-over-year to $19.7 billion. Boosted by the strength of AWS, operating income was $3.3 billion, beating the street’s forecast of $1.75 billion, while an EBIT margin of 2.7 % also exceeded the consensus of 1.5%.
With EPS of -$0.20, Amazon created a negative surprise on Wall Street, with analysts expecting the figure at $0.14. However, the company’s outlook was strong, as it guided revenue between $125 billion and $130 billion in the third quarter, slightly above consensus (midterm) expectations for $126.5 billion.
AWS Growth Supports Morgan Stanley (NYSE: MS) Brian Nowak’s thesis; he believes the segment’s success will have a positive impact on other parts of the business.
“Demand remains strong as AWS backlog accelerated to ~13% Q/Q growth. AMZN is also ramping up its investments in AWS (upcoming capex/D&A, sales and product engineers) as AMZN intends to lean to increase market share even in a cooling macro environment,” Nowak noted.
“This is long-term bullish growth from AWS and, in our view, should also be a signal of AMZN’s confidence in future retail profitability…given 1) we know that AMZN’s stock price is important to employees, 2) the stock has lagged, and 3) we don’t think AMZN would choose to look into investing its AWS profit pool ( which has arguably supported the stock through the retail woes) unless it has confidence that retail is likely to deliver,” the analyst added.
These comments underpin Nowak’s overweight (i.e. buy) rating on AMZN, while his price target of $175 implies the shares will rise 31.3% over the next year. (To see Nowak’s background, Click here)
What is AMZN Stock’s price target?
Overall, Wall Street remains firmly in Amazon’s corner; With the exception of one skeptic, the other 37 recent analyst reviews are positive, naturally culminating in a strong buy consensus rating. Amazon’s average price target is just a little above Nowak’s; at $177.05, the figure represents potential year-over-year gains of 32.85%.)
Often decked out with the tag “the Amazon of China”, the cliché is not without reason. Alibaba remains the dominant force in China’s e-commerce industry, driven by its national platforms Taobao and Tmall, while its retail marketplace, AliExpress, is used by consumers around the world. It is also the leader in China’s cloud infrastructure services industry, with Alibaba Cloud taking the bulk of the market share.
That said, unlike Amazon, whose profitability profile is driven by the success of its cloud business, Alibaba still relies heavily on e-commerce sales to offset cloud-related losses. The problem is that the growth of the Chinese economy has hit a brick wall, which has affected the business.
After nearly two decades of continuous expansion, in its latest quarterly report, for the first quarter of fiscal 2023, the company’s revenue growth slipped into negative territory for the first time.
Revenue fell 0.1% from the same quarter last year to $30.69 billion, although it should be noted that Wall Street expected this figure to be worse, having called for sales of $30.16 billion. Despite its ongoing investments, the company also posted a net profit surprise; The non-GAAP EPADS of $1.75 improved analysts’ forecasts of $1.56 per share.
Alibaba had other problems to solve; he regularly quarreled with national regulators while the prospect of Chinese stocks being forced off US exchanges also hung over his head.
Nonetheless, it was improving fundamentals that drew praise from Truist’s top analyst, Youssef Squali, who believes the company is moving in the right direction.
“We remain constructive on BABA, which despite posting its first quarter of negative year-on-year revenue as a public company in Q1 2023, reported results that exceeded revenue expectations. and earnings as fears of a Chinese macro slowdown weighed significantly on sentiment,” the five-star analyst said. “We are encouraged by the company’s comments on July’s improving trends compared to May/June, and believe that BABA’s more disciplined attitude towards organic investing should lead to a return to a more profitable growth in F2H23.”
Along with a buy rating, Squali has a price target of $135 for Alibaba shares, providing room for growth of around 53% over the coming year. (To see Squali’s track record, Click here)
What is BABA Stock’s price target?
Alibaba’s ratings are almost unanimously positive. A sell rating is countered by 17 buys, all merged into a consensus strong buy rating. Alibaba’s average price forecast of $156.12 implies upside potential of 69.4% from current levels.
Conclusion: BABA stock may have greater upside potential
So which stock ultimately represents a better opportunity right now? It looks like the pundits on the high street think you can’t really go wrong either, but purely from a yield standpoint, with upside potential of 69.4% for BABA versus 32.85% with AMZN, the Chinese giant is the one for you. at present.