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Education Series: Single-Stock ETPs

E-Commerce ETPs, Part 1: Amazon & Alibaba

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Websim is the retail division of Intermonte, the primary intermediary of the Italian stock exchange for institutional investors. Leverage Shares often features in its speculative analysis based on macros/fundamentals. However, the information is published in Italian. To provide better information for our non-Italian investors, we bring to you a quick translation of the analysis they present to Italian retail investors. To ensure rapid delivery, text in the charts will not be translated. The views expressed here are of Websim. Leverage Shares in no way endorses these views. If you are unsure about the suitability of an investment, please seek financial advice. View the original at

“E-Commerce companies” – once restricted to the likes of Amazon and eBay – are now legion. As we mentioned in our article in December, there are now over 24 million stores selling online using a variety of means – a far cry from simply books and used items.

Top e-commerce companies have been evolving and adapting to the new norms in many different ways. We start Part 1 of this two-part series by digging deep to identify the new edges being defined by two “old school” e-commerce giants – Amazon (ticker: AMZN) from the U.S. and Alibaba (ticker: BABA) from China.

 

E-Commerce: Landscape and Leaders

Over the past few years, the online retail landscape has been growing by leaps and bounds. According to the U.N. Conference on Trade and Development (UNCTAD), just seven countries accounted for 65% of global online retail (or “B2C”) sales in 2019. In 2020 these seven countries saw 19% of their retail sales completed online.

Despite the reduction in some B2C companies’ revenues due to the pandemic in 2020, the total Gross Merchandise Value (GMV), i.e. the total value of goods and services provided, for the top 13 B2C e-commerce companies rose by 20.5% in 2020 with a total value of $2.9 trillion.

However, it bears noting that in terms of percentages, B2B e-commerce, represented 82% of all e-commerce in 2019 with a total value of $21.8 trillion over online market platforms and electronic data interchange (EDI) transactions. B2B revenues, while impacted by the pandemic in 2020, are expected to swing back as the global economy regains its footing.

Nonetheless, after registering sales estimated at $4.28 trillion in 2020, B2C sales is projected grow further upwards over the next few years.

By the end of 2021, it is estimated there will be more than 2 billion people buying goods and services through e-commerce portals, with India ranking first in retail e-commerce growth by 2023. Globally, e-commerce companies’ revenue is predicted to reach more than $6 trillion by 2022.

As seen above, Amazon is a monster in the online retail space. As per data for 2019-2020, online retail accounts for over 70% of its revenue.

However, as we had seen with Uber, revenue doesn’t always correlate with profits. A company’s operating income would be a more revelatory indicator of profitability since it reports the amount of profit realized from the company’s ongoing operations.

Amazon’s earnings reports reveal that Amazon Web Services (AWS), which accounted for a modest 12.4% of the company’s revenues, was responsible for more than 63% of the entire company’s operating profit – a sum of $13.5 billion – for 2020. Going from strength to strength since 2014, AWS is now the dominant profit driver for the company.

Cloud Market: Hidden Minutiae

The growth in cloud-based services is the driver for Amazon’s investment in and deployment of AWS. Trends and studies indicate that businesses typically find that costs of computing are lower with the “cloud” than with dedicated computing infrastructure. This is also robust growth forecasted in cloud computing over the next several years.

Source: TechNavio

Since the launch of AWS on March 14, 2006, it is estimated that this division alone accounts for over 30% of total global revenue from cloud computing in recent years.

While the battle for “cloud” market share puts Amazon squarely in competition with Microsoft, Google and IBM, its China-born rival Alibaba also appears to be a serious contender that seems to be inching up to tech giant Google. In 2020, Alibaba Cloud showed growth rates comparable to Microsoft and Google with AWS being nearly half of that.

However, Alibaba’s fiscals reveal a troubling statistic here: unlike Amazon’s AWS, Alibaba Cloud has been running at a net loss for over 3 years.
The reason for the heavy losses in Alibaba Cloud is due to the company’s ongoing battle for dominance in its home market: China. The company faces stiff competition from Baidu, Tencent and Huawei here whereas AWS is relegated to the background with a paltry market share of around 4%.
At the end of 2019, Alibaba Cloud’s market share was estimated at 46.4%, which highlights why the company is focused on building capabilities for long-term dominance. Thus, in a reverse of Amazon’s story in the present day, Alibaba’s dominance in online retail fuels its long-term adventure in cloud computing (just as was the case for Amazon over 15 years ago).

 

In Conclusion

In terms of stock performance, Alibaba had a spectacular start to 2021 with Amazon being more muted in comparison to the benchmark S&P 500 (SPX) with very interesting results since.

Reports surfaced in March that, Alibaba – along with many other Chinese tech companies – was being targeted by the Chinese government as part of its ongoing anti-monopoly crackdown. However, reports also indicated that Alibaba would likely face no more than a hefty fine. In April, the company was ordered to pay $2.8 billion in fines as well as carry out a comprehensive revamp of operations and submit a “self-examination compliance report” within three years. Following the decision, the company’s stock has gradually been regaining its momentum and aligning with Amazon’s performance.

Given the company’s fiscals, it should come as no surprise that long-time AWS chief Andy Jassy is now at the helm of Amazon after Jeff Bezos stepped down. In fact, shortly after Jassy officially took over in July, the U.S. military’s $10 billion JEDI Cloud contract – allegedly awarded unfairly by former President Trump to Microsoft over Amazon – was cancelled and a new contract being solicited with both Amazon and Microsoft competing for it, leading to Amazon stock price surging upwards.

This story also signifies that e-commerce would likely no longer be the mainstay of Amazon’s growth story. Given the level of competition in the China, Alibaba is going down the same road and will likely continue to burn cash to establish dominance in the “cloud” market. However, given data security concerns on account of it being a Chinese company, it is unlikely that it would find significant footing outside of China.

Within their home markets, however, both companies face stiff competition in their core business – online retail. Stay tuned for Part 2 coming out this Thursday for an overview of key competitors rising against Amazon and Alibaba.

References:

  1. How many people shop Online in 2021?, Oberlo
  2. Cloud Computing Market to reach USD 287.03 Billion during 2021-2025 | Market Insights and Forecasts | Technavio, TechNavio
  3. Cloud services spending jumps by $10 billion in final quarter of 2020, TechRepublic

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Sandeep Rao

Research

Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.

Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.

Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.

Violeta Todorova

Senior Research

Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.

Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.

Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.

Julian Manoilov

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Julian joined Leverage Shares in 2018 as part of the company’s premier expansion in Eastern Europe. He is responsible for web content and raising brand awareness.

Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.

For Julian, Leverage Shares is an innovator in the field of finance & fintech, and he always looks forward with excitement to share the next big news with investors in the UK & Europe.

Oktay Kavrak

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Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.

He joined LS from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.

Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.

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