Bloomberg News

Amazon’s Profit Weakness Highlighted by Alibaba’s IPO Filing

May 07, 2014

Alibaba Group Holding Ltd. is often called the Amazon.com Inc. (AMZN:US) of China. Yet the Asian company’s initial public offering filing shows that the differences between the two e-commerce giants are vast.

Alibaba disclosed yesterday in its prospectus (ALIBABZ:US) with the U.S. Securities and Exchange Commission that its profit totaled $2.8 billion for the nine months ended Dec. 31 on revenue of $6.5 billion. By contrast, Amazon hasn’t had much in the way of net income during its 20-year history, with $274 million earned for all of 2013 on sales of $74.45 billion. Put another way, Amazon makes less than a penny for every dollar in revenue, while Alibaba makes about 43 cents.

“People may be very surprised by comparing the balance sheets of Amazon and Alibaba,” said Yan Zhang, professor of strategic management at Rice University, who has been tracking Alibaba. “Once they see the differences in the business models, they’ll understand why.”

Alibaba’s ability to churn out profits underscores how Amazon Chief Executive Officer Jeff Bezos’s strategy of pouring money back into the business and pressuring already razor-thin margins isn’t the only way to become one of the world’s biggest online-commerce companies. That may exacerbate investors’ recent dissatisfaction with Amazon -- they have pushed down the company’s shares 25 percent so far this year, as Bezos ramps up spending on fulfillment centers and delivery operations.

Investor Alternative

Having Alibaba’s shares trading on a U.S. stock exchange will offer global investors an alternative to Amazon’s stock, said Edward Williams, an analyst at BMO Capital Markets. The option to invest in either Amazon or Alibaba may sharpen as both companies increasingly push into each other’s home turfs, with Amazon working to increase sales in China and Alibaba stepping into the U.S., he said.

“As they begin to play in each other’s sandbox, it becomes more of a threat,” Williams said. “That’s where competition becomes more intense.”

Mary Osako, a spokeswoman for Seattle-based Amazon, didn’t respond to a request for comment. Lin-Hua Wu, a spokeswoman for Hangzhou-based Alibaba, declined to comment.

The different financial profiles of the online commerce companies are driven by their cost structures. Alibaba doesn’t buy the products it sells, nor does it pay for the warehouses where goods are stored, or the delivery and logistics infrastructure needed to get a package to a person’s doorstep.

Hybrid Model

Alibaba’s three main websites -- Taobao Marketplace, Tmall and Juhuasuan -- instead serve as an intermediary to connect buyers and sellers. In a kind of hybrid of EBay Inc. (EBAY:US) and Google Inc. (GOOG:US), Alibaba then collects fees on some sales or sells advertising for merchants who want to get featured higher when a customer searches for products.

In its prospectus, Alibaba said its business model is structured so that it doesn’t sell directly to customers because that would mean competing against the merchants on its marketplaces.

“This business model drives our profitability and strong cash flow, which give us the flexibility to further improve our platform, expand our ecosystem and aggressively invest in people, technology, innovative products and strategically important assets,” Alibaba said.

Amazon, meanwhile, has built out a massive infrastructure of distribution centers and delivery options. The company’s expenses rose 23 percent in the first quarter, with fulfillment costs climbing 29 percent and technology and content costs jumping 44 percent.

Stiffer Competition

Alibaba may use IPO proceeds to move its business model into the U.S. market, which will pose a long-term threat to Amazon’s business, said Scot Wingo, co-founder and CEO of ChannelAdvisor Corp., whose e-commerce software is used by more than 2,000 online merchants.

Alibaba co-founder and CEO Jack Ma has already been buying or investing in smaller U.S. companies that may lay the groundwork for a bigger push into the U.S. In 2010, Alibaba agreed to buy online marketplace companies Vendio Services Inc. and Auctiva. More recently, it has invested in companies including delivery service ShopRunner, mobile-application search engine Quixey and messaging app TangoMe Inc. The company has also started a U.S. website called 11 Main.

International Ambitions

In its filing, Alibaba downplayed its ambitions in the U.S. and instead emphasized the growth opportunities in China, where Internet usage and online shopping still trail countries like the U.S., Japan and Germany.

“Our business benefits from the rising spending power of Chinese consumers,” the company said in its prospectus.

Alibaba could use its IPO proceeds to increase investments in China, making it more difficult for Amazon to make inroads in that market. Alibaba has begun spending on fulfillment centers in its home country to speed delivery to customers, said Kelland Willis, who studies the China retail market for Forrester Research.

Still, holding the IPO in the U.S. signals Alibaba wants to grow outside of China, Wingo said.

“It’s what are they going to do with the $20 billion that is going to be the big question,” Wingo said in an interview. “It signals highly that they are going to be much more global and that could be a serious threat for Amazon and EBay.”

Any progress by Alibaba in the U.S. won’t happen immediately, said Zhang of Rice University.

“Just as it is challenging for Amazon to penetrate the Chinese market, it will be challenging for Alibaba to penetrate the U.S. market,” she said.

To contact the reporter on this story: Adam Satariano in San Francisco at asatariano1@bloomberg.net

To contact the editors responsible for this story: Pui-Wing Tam at ptam13@bloomberg.net Reed Stevenson


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