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Amazon Vs Baba

Amazon For The Win… For Now Anyway.

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Don’t Listen To Me, But Please, Hear Me Out: # 41

Shaheeda Abdul Kader, November 22 2021

Amazon For The Win…For Now Anyway

In September, I wrote about Loss Aversion and how to decide if we should, Buy, Sell or Hold a stock. It is good idea to peruse that blog quickly. I discussed the difference between Loss Aversion and Risk Aversion.

I asked you if when you look at investing, do you say, “Wow! Look at how much money I can make!” or do you say, “Ooh! I could potentially lose a lot of money.”

I also told you about the wager I was running with my good and brilliant friend Fred. Fred was bullish on Alibaba ($BABA) and I was bullish on Amazon ($AMZN). Both are great companies whose stock had taken a brutal whipping in the stock market this year. Fred had encouraged me to sell $AMZN and buy $BABA.

In my last blog, I explained why I was going to hold on to $AMZN. So, did I make the right decision?

Amazon, Alibaba Stock Performance

Tables 1 and 2 below show the stock performance for $AMZN and $BABA over 2020 and 2021 respectively. Of course we must compare their performance to the market and so I have include S&P 500 ETF $SPY as well.

Table 1
2020 ReturnsQ1Q2Q3Q4FY 2020
AMZN2.7%44.6%9.4%1.1%71.6%
BABA-11.5%15.0%36.1%-19.8%5.9%
SPY-20.2%25.8%8.3%11.4%17.2%
Table 2
2021 ReturnsQ1Q2Q3YTD as on Nov 19 21201 Year
AMZN-2.9%8.8%-4.3%14.7%15.3%
BABA-0.5%1.1%-33.3%-44.7%-49.4%
SPY7.8%7.2%0.0%27.9%32.6%

In 2020, $AMZN far outperformed $BABA and $SPY. While $AMZN returned nearly 72% for the year, $BABA returns were tiny at 5.9% and the market or $SPY returned 17.2%.

Of course China was in extreme lockdown in 2020, so we can understand why $BABA did not perform as well. One would have imagined that $BABA would be a better pick at the beginning of 2021 as there is more opportunity for it to grow. $AMZN had already shot 72% and its much harder to repeat such a performance. But that is not what happened. As you can see in Table 2, both $AMZN and $BABA performed rather poorly when compared to the market or $SPY in 2021.

However, $AMZN performed better than $BABA in every quarter. Furthermore, $AMZN has rallied well these past 2 months to even hit an All-Time-High (ATH). It is now up 14.7% YTD or 15.3% for the one year between November 23 2020 and Nov 22 2021.

On July 8 2021, $AMZN hit an ATH of $3,731.41. As of November 19th, it is (1.5%) down from its ATH. $BABA on the other hit its ATH of $317.14 on October 27, 2020. It is down (55%) from those highs as of Nov 19, 2021. Comparatively, the $SPY is only down (0.2%).

So while I enjoy the glory of my small win with my friend Fred, lets look at why $BABA failed to dazzle investors. After all, one of the all time best investors in the world, Charlie Munger increased his stake in $BABA even as it’s stock price was falling.

In a regulatory filing, Munger’s newspaper publishing company and investment firm Daily Journal revealed it boosted its long position in BABA by over 80% during the third quarter of 2021, to more than 302,000 shares. Which is particularly interesting given the stock’s performance in 2021 has been nothing short of awful.Munger boosted its long position in Alibaba by over 80% during Q3 of 2021, to over 302,000 shares.

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Alibaba Performance

Figure below is from Alibaba’s Earnings Report for the Quarter ending September 2021.

Alibaba September Quarter 2021 Earnings
Alibaba September Quarter 2021 Earnings

The Good

  • Revenue increased by 29% YOY (Year-Over Year)
  • Increased Annual Active Customers to about 1.24 billion, which is an increase of approximately 62 million.
  • Income from operations increased by 10% YOY
  • Cloud Computing business grew 33% YOY but they have stiff competition from Huawei.

The Bad

The bad things are really bad because we are comparing them to the pandemic year 2020 to what should have been a reopening positive play in 2021.

  • Non-GAAP net income was $4.4 billion, a decrease of 39% YOY
  • Margins fell from 9% to 7% for the same period.
  • Adjusted EBITDA margin (Earnings Before Interest, Taxes, Depreciation and Amortization) fell from 31% to 17% for the same period. This is a huge drop in profits. When comparing YOY, the EBITDA margin fell by 27% and Net Income by 87%.
  • As a result EPS (Earnings Per Share) also fell.

The Ugly

Alibaba revised down its guidance for 2022 expecting revenue to grow between 20% and 23%.

But the real ugly bit is what I warned about in my earlier blog: Country Risk. We still do not know if the Chinese Government will implement further regulations that may impede Alibaba’s growth. Temaek Holding, the Singapore’s State Investing Company cut its stake in Alibaba by 16%. Here’s what they had to say.

“We will probably wait to deploy more capital till we have a little bit more regulatory clarity in that space,” he said. “I would expect in the next few months you will have regulatory clarity, and that will shape some winners and losers out there.”

Chief Investment Strategist Rohit Sipahimalani, Temasek

It is important to note that Temasek is not a hedge fund and does not indulge in speculating. They have about $280 Billion under management. They are smart, long term investors, but they too believe that even at these low prices, $BABA may not be a steal. Baba closed at $140.3 on November 19.

$BABA continues to have a lot of headwind because it is heavily reliant on Chinese consumer spend for its growth. The recent real estate crash have considerably dampened consumer savings and sentiment. China has had declining GDP growth in 2021 and these factors will impede $BABA probably through 2022.

Final Thoughts

I believe fundamentally $BABA and $AMZN are both very strong companies. They both continue to make capital investments and have healthy cash positions.

At the moment I am holding $AMZN. I added to my position as the stock fell significantly. I will likely continue to add small positions if the price looks enticing.

$BABA on the other hand is a wait and watch strategy for me. There are far too many opportunities that I could tackle with less unknown risk than $BABA for now. If you have $BABA, perhaps you can hold for now.

Allow me to quote, Donal Rumsfeld.

Reports that say that something hasn’t happened are always interesting to me, because as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns—the ones we don’t know we don’t know. And if one looks throughout the history of our country and other free countries, it is the latter category that tends to be the difficult ones.

Donald Rumsfeld, Former Secretary Of Defense, USA

In the case of Chinese stocks, I am rather weary of the unknown unknowns. We do not know what if any more regulations will be imposed and how these may impact companies in China. We do not know if the companies know how to comply with those regulations either.

As always, whatever you decide to do, please make sure your decision is aligned with your risk tolerance as well as investment goals.

In my case, my portfolio is diversified and so long as my returns are on par or better than SPY, I’m happy.

If you want to learn more about investing in the stock market, may I suggest you start here?

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I usually blog about investing in the stock market. If you would like help on how to budget, save or invest more, please feel free to reach me, on Twitter @saq3 or LinkedIn @Shaheeda Abdul Kader, or leave a message at say@shaheedasays.com. I’d be happy to offer you my services. Please do check my other blogs here.

Disclaimer:

I am NOT a certified broker or financial advisor. Please DO NOT make investment decisions based solely on my blogs. My intention is to show you how to research stocks or funds for yourself . I hope you will be empowered and knowledgeable to do your own investigations and invest with confidence. It is best to consult with your broker or advisor if you have questions. You can also reach me, and I’ll do my best to help you with your queries. I am mostly available on twitter @saq3.

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Shaheeda Abdul Kader

After 25 years of working for corporations, being an entrepreneur and managing investments for my family, I now want to help others find their financial freedom