BABA: Alibaba vs. Sea Ltd: Which E-Commerce Stock is a Better Buy?

Alibaba Group Holding Ltd (BABA) and Sea Ltd. (SE) are two of the world’s biggest e-commerce platforms. BABA operates mainly through the three business segments — Alibaba, Taobao, and Tmall. There are three business segments for SE as well — Garena, Shopee, and SeaMoney.

While the rising number of coronavirus cases and the holiday season will boost revenue growth for BABA and SE in the upcoming months, convenience is the biggest driver that will sustain the demand for these platforms beyond the life of the pandemic.

Both stocks have generated significant returns over the past three years. While BABA returned 49.7% over the period, SE gained 1379.3%. In terms of year-to-date performance, SE is a clear winner with 357.2% returns versus BABA’s 23.2%. But which of these stocks is a better pick now? Let’s find out.

Latest Movements

Earlier this month, the Italian Trade Agency pledged to enable 300 local Small and Medium Enterprises (SMEs) to digitize on BABA’s Alibaba.com platform to foster online growth. The company is helping the Italian government with its ‘Made in Italy’ campaign. Last month, BABA entered into a global agreement with Farfetch and Richemont to accelerate the digitization of the luxury industry.

BABA generated $74.1 billion in gross merchandise volume (GMV), up 26% year-over-year, from the 11.11 Global Shopping Festival held from November 1^st to November 11^th. Moreover, to reduce the event’s carbon footprint from its packages, Cainiao used its self-developed smart-packaging algorithms to sort products into boxes of the proper size, minimizing waste from over packing for 12 million shipments.

Earlier last month, Cainiao Aeropolis eWTP Hub, a joint venture between BABA and Malaysia Airports, commenced operations that are expected to help facilitate 24-hour delivery within Malaysia. The company signed a Memorandum of Understanding (MoU) in October for a strategic partnership with BMW.

SE conducted a survey in October that revealed that there is a huge opportunity for e-commerce in Malaysia. 70.2% of the Sellers projected at least 100% year-over-year growth in sales on their Shopee stores from the 11.11 Big Sale. CapitaLand and Shopee collaborated to drive sales, traffic, and engagement for six CapitaLand malls through gamification.

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SE and Visa Inc. (V) announced a five-year regional strategic partnership a couple of months ago. As per the agreement, their partnership will incentivize Micro, Small, and Medium Enterprises (MSMEs) to digitize their business on Shopee and adopt digital payments through V.

The company launched the Shopee Media Agencies Partner Program (SMAP) comprising five leading global media agencies which is expected to empower media agencies with an in-depth e-commerce knowledge and skills to help brands and sellers scale and succeed online.

Recent Financial Results

BABA’s total revenue surged 30.3% year-over-year to $22.8 billion for the quarter ended September 2020, driven primarily by growth in its core commerce segment.

BABA’s core commerce revenue increased 29.3% year-over-year to $130.9 billion. The company’s cloud computing segment increased 60.4% year-over-year to $2.2 billion. For the twelve months ended September 2020, annual active consumers increased 9.2% year-over-year to 757 million. The company’s EPS of $2.73 surpassed the consensus estimate by 27.6%.

SE’s net revenues increased 98.7% year-over-year to $1.2 billion for the third quarter ended September 2020. E-Commerce and other services revenue increased more than 113% year-over-year to $489.5 million. Gross profit increased 100.6% year-over-year to $407.6 million. Quarterly active users (QAUs) in the digital entertainment segment increased 78.3% year-over-year to 572.4 million.

Past and Expected Financial Performance

BABA’s revenue grew at a CAGR of 43.7% over the past 3 years. The market expects the company’s revenue to increase 61.7% for the quarter ending December 2020, 46.6% in 2021 and 30.9% in 2022. BABA’s EPS is expected to grow 54.2% for the quarter ending March 2021, and by 36.2% in full-year 2021.

In comparison, SE’s revenue grew at a CAGR of 111.7% over the past 3 years. The market expects SE’s revenue to increase 108.5% for the quarter ending December 2020, 82.3% in 2020, and 43.8% in 2021. The company’s EPS is expected to grow 32.7% for the quarter ending March 2021, and 37.8% in full-year 2021.

Profitability

BABA’s trailing-12-month revenue is 23.98 times what SE generates. Moreover, BABA is more profitable with a gross margin of 43.8% versus SE’s 30.1%.

Also, BABA’s ROE and ROA of 14.58% and 4.71%, respectively compare favorably with SE’s negative returns.

Valuation

In terms of forward P/E, BABA is currently trading at 25.40x, much more expensive than SE. However, SE is more expensive in terms of trailing-12-month P/S (24.03x versus BABA’s 8.13x), and its trailing-12-month EV/S of 24.95x is also higher than BABA’s 7.95x.

In terms of trailing-12-month price/cash flow as well, SE’s 265.10x is higher than BABA’s 23.64x.

Though SE looks much more expensive compared to BABA, it is worth paying this premium considering SE’s higher earnings growth potential.

POWR Ratings

While BABA is rated “Neutral” in our proprietary POWR Ratings system, SE is rated “Strong Buy”. Here are how the four components of overall POWR Rating are graded for both these stocks:

BABA has a “C” for Trade Grade, and Buy & Hold Grade, and a “B” for Peer Grade and Industry Rank. It is currently ranked #31 out of 115 stocks in the China industry.

SE holds an “A” for Trade Grade, Buy & Hold Grade, and Industry Rank and a “B” for Peer Grade. It is currently ranked #7 out of 59 stocks in the Internet industry.

The Winner

Both BABA and SE are good investment bets considering their market dominance and continued expansion. However, SE appears to be a better buy despite trading at a significantly higher valuation based on its higher earnings growth potential.

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SE shares were trading at $183.53 per share on Thursday afternoon, down $0.35 (-0.19%). Year-to-date, SE has gained 356.32%, versus a 15.56% rise in the benchmark S&P 500 index during the same period.

About the Author: Manisha Chatterjee

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst. More...