Alibaba (BABA 0.14%) is often called the "Amazon (AMZN 0.03%) of China" because it's the country's largest e-commerce and cloud company.
However, Alibaba is still a lot smaller than its American counterpart. Analysts expect Amazon to generate more than three times as much revenue as Alibaba this year, and its market cap of $1.7 trillion dwarfs Alibaba's market cap of approximately $333 billion.
But could Alibaba catch up to Amazon by the end of the decade? Let's take a fresh look at these two tech giants and their plans for the future to find out.
Image source: Getty Images
The differences between Alibaba and Amazon
Alibaba and Amazon are superficially similar, but their business models are very different. Alibaba generates most of its revenue and all of its profits from its commerce business, which houses its online marketplaces, brick-and-mortar stores, and logistics business. The profits from the commerce segment support the ongoing expansion of its unprofitable cloud, digital media, and innovation initiatives businesses.
Amazon generates most of its revenue from its retail business, which also operates online marketplaces and brick-and-mortar stores. However, Amazon generates most of its profits from its cloud infrastructure platform, Amazon Web Services (AWS). AWS' profits enable Amazon to expand its e-commerce and digital media ecosystems with low-margin and loss-leading strategies.
Simply put, Alibaba's long-term growth is still pegged to its commerce business, while Amazon's future expansion relies more heavily on AWS.
Another key difference is the regulatory environment. China's antitrust regulators probed and fined Alibaba in 2021 before imposing new restrictions on its exclusive deals with merchants and promotional pricing strategies. Amazon has also been targeted by antitrust regulators, but those challenges are milder, less concentrated, and scattered all across the world.
Which company has been growing faster?
Alibaba is smaller than Amazon, but it's only growing a slightly faster rate. Alibaba's revenue rose 41% in fiscal 2021 (which ended in March), or just 32% after excluding its takeover of the hypermarket operator Sun Art.
Alibaba expects its revenue to rise 20% to 23% in fiscal 2022. It expects the growth of its e-commerce business -- which faces tougher competitive, macroeconomic, and regulatory headwinds this year -- to decelerate.
Amazon's revenue rose 38% in fiscal 2020 (which aligns with the calendar year), and it anticipates 20%-22% revenue growth in fiscal 2021. Amazon's e-commerce business also faces tough post-pandemic comparisons, but it faces fewer competitive and regulatory headwinds than Alibaba.
Both companies could continue to grow at similar rates. Analysts expect Alibaba's revenue to rise 22% this year, 19% next year, and 18% in fiscal 2024. They expect Amazon's revenue to grow 22% this year, 18% next year, and 17% in fiscal 2023.
We should take those long-term estimates with a grain of salt, but they strongly suggest Alibaba won't catch up to Amazon anytime soon.
What the next eight years could look like
The global e-commerce market could grow at a compound annual growth rate (CAGR) of 29% from 2021 to 2025, according to ReportLinker.
However, most of that growth will likely come from emerging markets like Latin America and Southeast Asia, where MercadoLibreand Sea Limited's Shopee have already planted their flagsas entrenched market leaders.
Amazon and Alibaba both generate most of their revenue from mature markets. Amazon's top markets were the U.S., Germany, the U.K., and Japan last year. Alibaba still generates most of its revenue in China, where it faces intense competition from JD.comand Pinduoduo.
Therefore, it's likely that Amazon and Alibaba's e-commerce businesses will underperform the broader e-commerce market over the next few years. In response, they'll both likely increase their dependence on lower-margin retail initiatives -- such as brick-and-mortar stores -- to keep growing.
They'll also expand their digital ecosystems to lock in more shoppers and ramp up their overseas investments. Amazon will likely expand in India to challenge Walmart's Flipkart, while Alibaba will pour more money into Lazada, the former e-commerce leader in Southeast Asia, to strike back at Shopee. Those costly efforts will inevitably squeeze their margins.
From 2025 to 2030, the global e-commerce market might grow at an even slower clip as those platforms mature. That slowdown could reduce both companies' revenue growth rates to the low-teens by the late 2020s.
Alibaba won't be worth more than Amazon
Alibaba's valuations have been depressed by China's tech crackdown and the delisting threats in the U.S. over the past year.
As a result, Alibaba trades at just 13 times forward earnings and two times next year's sales. Amazon has a forward price-to-earnings ratio of 54 and trades at three times next year's sales. Some of Alibaba's investors might believe that if the regulatory headwinds wane, investors will flock back to the stock and rerate the stock at a valuation comparable to Amazon's.
But even if we quadruple Alibaba's stock price right now, it would still sport a much lower market cap than Amazon. Therefore, I don't see any possible way for Alibaba to become more valuable than Amazon by 2030.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Leo Sun owns Amazon, MercadoLibre, and Sea Limited. The Motley Fool owns and recommends Amazon, JD.com, MercadoLibre, and Sea Limited. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.
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