If you had only two stocks to choose from, would it be Alibaba Group Holding Ltd. (BABA ) or Amazon.com Inc. (AMZN)? Alibaba has had a blistering start to 2017, with the stock up nearly 42 percent so far this year. It far outstrips Amazon's 33 percent and also the broader indexes. The S&P 500 is up only a shade below 8 percent, and the Nasdaq is up a little bit over 15 percent.
Driving Alibaba's appreciation seems to be founder and Chairman Jack Ma's ability to grow revenue over the past couple of years: to be precise, revenue has risen by more than 13-fold in six years, expanding from $992 million in 2011 to nearly $23.5 billion as of the latest annual results. That's mind-boggling growth.
The market cap is enormous as well, at nearly $314 billion, putting it up there with some of the giants in tech.
When you look at Alibaba, though, and you start comparing it from a valuation standpoint to some of these tech giants, we find it is right in the middle of the pack, and much cheaper than Amazon. That's especially true when adjusted for growth, where Alibaba is the cheapest of the group.
Analysts are expecting big things from Alibaba over the next few years, with EPS growing from $4.21 to $6.95.
Earnings are being driven higher by strong revenue growth, which analysts estimate will increase from $30.65 billion to $49.03 billion.
Revenue growth of 60 percent over the next three years? EPS growth of 65 percent over the next three years? All of that is a bargain for investors currently paying roughly 20-25 times for future earnings.
This is versus an Amazon that is expected to grow revenue from $166 billion to $238 billion, or 43 percent under the leadership of founder and CEO Jeff Bezos. Here is the killer though for Amazon, though. Analysts are looking for Amazon to grow its EPS from $6.72 to $18.55, that is 176% growth in 3 years.
There may be worse problems than to have to choose between Alibaba and Amazon. Both seem to have their biggest growth ahead of them. Alibaba has an edge over Amazon on a PE, or price to earnings, basis. But when you measure by price to sales, Amazon is significantly cheaper .
We can run through any number of metric, and we could make cases for both companies. Both companies have substantial revenue and EPS growth, and with valuation flip-flopping, it doesn't make it easy to choose.
For Alibaba, one wildcard is what role will the Chinese government have in the company's future. And for Amazon, it could get so big that the U.S. government could mount an anti-trust suit as it did against IBM Corp. and Microsoft Corp. Unless something extraordinary happens, though, it looks like these two stocks will add value for some time to come. As an investor, it just depends on how fast you want to go - fast, or very very fast.
Michael Kramer is the Founder and Portfolio Manager of Mott Capital Management, LLC, a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendation made during the past twelve months. Past performance is not indicative of future performance..