BABA: Alibaba vs. Shopify: Which Stock is a Better Buy?

The e-commerce industry has been rattled by the news of the coronavirus vaccine. In-person shopping is projected to increase with the vaccine hitting the market, as people are likely to prefer retail shopping after months-long lockdown. E-commerce websites like Alibaba Group Holding Ltd. (BABA) and Shopify Inc. (SHOP) are expected to see a slowdown in traffic.

But that’s not all. As the largest e-commerce platform in China, BABA woes have increased as China recently proposed an antitrust law against monopolistic practices particularly in the tech sector. BABA’s shares dropped 4.5% from its Tuesday high following the news release. This came in after the regulators suspended Ant IPO, which was projected to be the largest IPO in history. The Ant IPO was expected to boost BABA’s growth significantly, as the company has 33% equity stake in the fintech start up.

However, despite these barriers, BABA’s fundamental strength has allowed the company to dominate China’s e-commerce industry, while marking its territory on a global level by emerging as the second largest seller. Also, BABA’s cloud computing segment has emerged as a key revenue driver for the company, thereby shielding it from investor bearishness regarding e-commerce stocks. According to a company press release, every 2 in 5 fortune 500 companies choose Alibaba Cloud.

SHOP, heavily reliant on e-commerce platforms, has witnessed record growth year-to-date, primarily due to the pandemic tailwind. Its unique business model connecting small businesses to customers worldwide is expected to be relevant post coronavirus as well, as these small businesses selling eccentric products might not be available at standard retail chains. Moreover, the upcoming holiday season should work as a major catalyst for both the players in the near term.

Both stocks have generated significant returns over the past five years. While SHOP has gained 3261.2% over this period, BABA returned 232.7%. In terms of year-to-date performance, SHOP is the clear winner with a 138.2% gain, compared to BABA’s 25.3% return.

But which stock is a better buy now? Let’s find out.

Latest Movements

BABA recently made headlines for breaking all records by generating revenues of $74.10 billion from the 2020 11.11 Global Shopping Festival, up 26% from the year-ago value. Approximately $5.30 billion of gross merchandise volume (GMV) was driven by the United States alone.

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Earlier this month, BABA partnered with Richemont to promote luxury brands on their respective websites, ensuring greater access in the Chinese markets. Both companies are heavily investing in Farfetch China Joint Venture and Farfetch Ltd. in this regard.

On October 26^th, BAB signed a Memorandum of understanding (MoU) with BMW to facilitate the digitization of auto sales. Under the agreement, both companies will jointly launch the first online sale and create a seamless online to offline digital experience for the premium auto brand BMW, across the country.

As part of the company’s new retail strategy, BABA has a 72% direct and indirect stake in Sun Art Retail for $3.60 billion. All of Sun Art’s physical retail stores have been integrated with BABA’s Taoxianda and Tmall Supermarket platforms since the acquisition.

Apart from developing its e-commerce presence, BABA has also strengthened its position in the cloud computing industry. Alibaba Cloud, which has been named the third largest Infrastructure-as-a-Service (IaaS) in the Asia Pacific region for three consecutive years by Gartner, extended its dominance over the past couple of months. In the third quarter of 2020, BABA emerged as the leading cloud computing provider in China, and accounted for 6% of the worldwide market. In September, BABA launched its first cloud computer.

SHOP recently released subscription products and post purchase upsells to make its conversion optimized checkout more flexible. These apps are integrated with back office and Shopify payments platforms, streamlining the ordering process. Earlier in October, SHOP partnered with TikTok to provide a higher audience base to Shopify merchants for advertising their products.

SHOP recently raised $1.14 billion through public offering of 1.27 million class A shares.

Recent Financial Performance

BABA’s revenues increased 30% year-over-year to $22.84 billion in the third quarter that ended September 2020. Annual active customers increased 2% sequentially to 757 million, while mobile monthly active users (MAUs) in China increased slightly from the prior quarter to 881 million. Excluding Ant Group share based rewards, BABA’s income from operations rose 44% from the year-ago value to $4.37 billion. Non- GAAP EPS rose 37% from the prior year quarter to $0.33, while non-GAAP net income grew 44% from the same period last year to $6.94 billion.

SHOP’s revenue increased 96% year-over-year to $767.40 million in the third quarter that ended September 2020. This was driven by a 42% rise in subscription solutions revenue, and a 132% rise in merchant solutions revenue, respectively. Gross profit increased 87% from the prior-year quarter to $405.10 million, while EPS rose 140.6% from the same period last year to $1.54.

Past and Expected Financial Performance

BABA’s revenue and total assets grew at a CAGR of 43.7% and 35.3% over the past year. This compares to SHOP’s revenue and total asset increase at CAGRs of 61.7% and 89.2% respectively, over the same period.

Analysts expect BABA’s EPS to increase 53.4% in the next quarter ending March 2021, 35.8% in the current year, and at a rate of 3.8% per annum over the next five years. The company’s revenue is expected to grow 64.3% in the next quarter, 45.7% in the current year, and 30.9% next year.

SHOP’ EPS is expected to grow 189.5% in the next quarter, 1,126.7% in the current year, and at a rate of 105.4% per annum over the next five years. The consensus revenue estimates indicate a 64.6% rise in the next quarter, 80.6% in the current year, and 32.1% next year.

Profitability

BABA’s trailing 12-month revenue is 35 times what SHOP generates. However, SHOP is more profitable with a gross margin of 53% compared to BABA’s 43.8%.

However, BABA’s ROE and ROA of 14.6% and 4.7% compare favorably with SHOP’s 4.4% and 0.02% respectively.

Valuation

In terms of forward non-GAAP P/E ratio, SHOP is currently trading at 255.88x, 888.7% more expensive than BABA, which is currently trading at 25.88x. SHOP is also more expensive in terms of forward non-GAAP PEG (7.16x versus 1.23x) and trailing 12-month price/sales (45.50x versus 8.26x).

In terms of trailing 12-month price/ cash flow, SHOP’s 496.70x is 1,967% more expensive than BABA’s 24.03x.

POWR Ratings

BABA is rated “Buy” in our proprietary POWR Ratings system, while SHOP is rated “Neutral”. Here’s how the four components of the POWR Rating are graded for both these stocks:

BABA has a “B” for Trade Grade, Peer Grade, and Industry Rank, and a “C” for Buy & Hold Grade. It is currently ranked #15 out 115 stocks in the China group.

SHOP has a “C” for Trade Grade, Buy & Hold Grade, Peer Grade, and Industry Rank. It is currently ranked #13 out of 35 stocks in the Internet – Services industry.

The Winner

While SHOP reflected impressive growth so far this year, most of this growth is attributable to the pandemic. The future of the e-commerce industry after the pandemic may not be this rosy, as people are inclined towards retail outlet shopping after months of social distancing. However, BABA’s diversified business model with stake in cloud computing and fintech companies, mitigate the risk of an e-commerce slump in the upcoming months. Thus, at a cheaper valuation, BABA is a better buy here.

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BABA shares were trading at $263.76 per share on Thursday afternoon, down $1.89 (-0.71%). Year-to-date, BABA has gained 24.36%, versus a 11.06% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...