Since April 23, 2016, shares of Amazon's (NASDAQ: AMZN) have risen 157%. This was no accident. On that day, as part of its first-quarter earnings results, Amazon broke out its Amazon Web Services (AWS) division results for the first time.
The response from investors was dramatic:
How much revenue AWS actually generated for Amazon had long been a source of speculation. Was the service, a cloud-based data management and storage service, even profitable?
A great business gets even better
Even better than Amazon, and with a far larger potential market
It has been noted that Alibaba has more in common with eBay than Amazon. It serves as a marketplace for hundreds of thousands of retailers to reach consumers, thus avoiding the need to incur massive capital costs of maintaining inventories in warehouses.
This is not to detract from Jeff Bezos's remarkable achievement. His enterprise is changing the very way goods are sold (and delivered). Alibaba simply has a more profit-friendly business model. In FY 2016, Amazon's gross profit margin was 36%. Alibaba's was 63.5%. With the addition of an Amazon AWS-like cloud service, Alibaba's ability to generate profits in the years ahead has only improved.
With its shares at 34 times forward S&P Global Market Intelligence earnings estimates, Alibaba's stock may seem expensive. However, analysts currently estimate that the company's EPS will grow at 31% per year through 2022, a year in which they believe the company will earn just below $14.82 per share. This compares strongly to Amazon's own earnings growth profile. Analysts following the company expect Amazon to earn around $3.50 this year and grow the bottom line to $36.72 by FY 2021.
Alibaba has just had its Amazon AWS moment. And, as icing on the cake, it trades at a lower earnings multiple than the company it is so often compared to. Wise Fools would do well to give Alibaba strong consideration as an addition to their portfolios.
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