How Alibaba Is Losing its Most Important Advantage

- From Panos Mourdoukoutas

Recently, Alibaba Group Holding (BABA) appears to be losing its most important asset - an Amazon monopoly (NASDAQ: AMZN) of e-commerce business that has not yet been challenged by the Chinese government. Both Amazon and Alibaba benefit from their e-commerce monopolies in their respective home markets, and losing that advantage could prove bad for Alibaba in my opinion.
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The Chinese government recently launched an investigation into Alibaba's anti-competitive practices. This is the latest indication of Beijing's determination to curb the country's ever-growing internet monopolies.
Alibaba has seen a rapid rise in national and global markets for years. In fact, Alibaba beats Amazon on several key metrics such as gross profit, sales growth, and operating income (see table below).
Companies
Alibaba
Amazon
Gross profit
$ 230 billion
$ 114.99 billion
3-year sales growth (%)
45
25.6
3-year EBITDA growth (%)
38.1
42.2
Operating Income Growth (%)
18.83
5.72


Key metrics: Alibaba versus Amazon
Companies
ROIC
WACC
ROIC-WACC
Alibaba
8.46%
6.64%
1.82%
Amazon
11.37%
7.76%
3.61%


This is thanks to a long list of benefits that "moat" around its market. Other sources of moats are location, economies of scale, economies of scale, networking and, above all, government support.
While such relationships are important in every country, they are even more critical in China. The government is the goalkeeper of the economy and has far greater power than the US government in deciding who will be in which business and for how long.
Alibaba's Taobao website, for example, beat eBay Inc. (EBAY) in China in the early days when Alibaba was a startup and eBay an industrial giant, thanks to the government backing the player on their home turf. They also helped Alibaba get on the list of five companies selected by the Chinese government to get started in internet banking. This is an enormous opportunity in a country where the government owns the banks.
Government opposition can break industry giants as quickly as it did them. This seems to be the case with Alibaba lately. A prime example of this is that Chinese regulators stopped Alibaba's plans to go public for the Ant Group subsidiary back in November.
Just last week, the state regulator opened an antitrust investigation into Alibaba's practices. The financial markets have taken note of it and put Alibaba shares on a spin. On Friday, the stock closed at $ 222.
While it is still unclear how far the Chinese authorities will go to curtail Alibaba's monopoly, one thing is clear: Faced with government opposition, the company faces competition from fast-growing startups like JD.com Inc. (JD), which its dominance could undermine its position in the world's largest internet market.
Disclosure: I do not have a position in Alibaba. I own shares in Amazon.
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