Alibaba's Market Cap Is Closing In on Amazon's Again: 16 Charts on Its Three Years as a Public Company

Two companies that dominate retail in China and the US are both using that dominance to “tax” everyone else

Jack Ma nearly took back the title of the world's biggest retailer.

On September 19, Alibaba's market cap hit $457.9 billion, only $6.6 billion short of Amazon's.

He didn't catch Bezos. US stocks fell back afterward, pushed down by the North Korean nuclear crisis, talk of a Fed rate hike, and other news. Alibaba and Amazon were not spared.

Amazon then rebounded faster, widening the gap to $18.3 billion.

All this back-and-forth makes it easy to forget one fact: when Alibaba went public in 2014, it was already worth more than Amazon by roughly the value of an entire Baidu — Alibaba at over $230 billion, Amazon at just over $100 billion.

In 2014, investors had plenty of reasons to like Alibaba: its near-monopoly over China's e-commerce market, the grip its affiliate Alipay had on mobile payments, and more. Those expectations also made Alibaba the largest IPO in the history of the US stock market.

Amazon, meanwhile, was living through the Fire Phone debacle and two straight quarters of heavy losses, and investors were dumping the stock. Within a year, the two companies' market caps had swapped directions.

In 2015, Bezos disclosed the numbers for Amazon Web Services. That business was the key to whether Amazon made money or at least stopped losing it, and with it Bezos once again talked investors into giving up short-term returns and funding his spending. The stock rose quickly, carrying the company into the world's top five by market cap.

Alibaba faced a different kind of doubt that year. Investors did not believe the transaction volumes on Tmall and Taobao said anything about the company's health, because behind the record-breaking Singles' Day numbers, revenue and profit were not growing at the same pace.

By the start of this year, Alibaba was worth $240 billion, and Amazon was still 1.66 times that.

By mid-year, Alibaba had issued a string of high-growth forecasts for its revenue, and Wall Street believed them — the stock rose 5% that day. One view holds that Alibaba stands for China's fast-growing middle class, and that this group's considerable spending power will eventually turn into good-looking numbers on its financial statements.

That expectation keeps pushing the share price up. The fight between these two companies, which make money in similar ways and dominate in similar ways, is not over.

Alibaba and Amazon are the biggest e-commerce companies in their own markets, but what they really do is tax retail

Alibaba and Amazon look more like retailers. Their revenue says the same thing: 85% of Alibaba's revenue comes from e-commerce, and for Amazon the figure is over 90%.

But there is another way to describe what they do: they take a cut of an entire industry, or, put differently, they tax it.

The argument comes from Chamath Palihapitiya, CEO of the investment firm Social Capital. Palihapitiya has a good eye for companies — he joined both AOL and Facebook as an executive while they were still small, and shared in the payoff when their shares soared after going public.

Asked which single stock he would put all his money into and hold for ten years, Palihapitiya named Amazon.

What Amazon really does, he argued, is build infrastructure, make other companies depend on it, and then take a cut. He called this a tax Amazon levies on other companies.

It works like a government building a highway and charging every vehicle a toll. Or like a power plant generating electricity and sending it to every house through the grid: you pay for the electricity and never buy a generator.

One reason the two can do this is that each dominates its home market, China and the US. Alibaba is worth eight times JD.com, its biggest rival in China. Amazon is worth twice Walmart, long considered the best company in the world at selling goods.

Having cornered their markets, they control where e-commerce traffic goes, and shoppers and merchants have nowhere better to turn. Neither company carries the parcels itself, but each offers merchants a complete logistics system to plug into.

Amazon rents out the warehousing, payment, and delivery operation it spent years building to the merchants on its platform. Third-party sales now account for half of everything Amazon sells.

Alibaba is in logistics too, by another route. In 2013 it spent 5 billion yuan to set up its logistics subsidiary, Cainiao, pulling partners under one management structure in an attempt to fix the much-criticized delivery experience on Taobao and Tmall.

That dominance has lately reached offline retail. Alibaba is remaking the private convenience stores on China's streets: owners pay an annual technology service fee of 3,999 yuan and must order a set amount of goods from Alibaba.

E-commerce is where both companies make their money, and what drives their growth

Alibaba went public on September 20, 2014, and closed the day worth $231.44 billion. It passed not only Tencent and Baidu but Facebook and Amazon as well, becoming the world's second-largest internet company.

An e-commerce business built mainly on the Chinese market held up that valuation. In the 12 months to June 2014, Alibaba's seven e-commerce platforms handled 1.83 trillion yuan of transactions in China — more than all its major rivals, including Amazon, JD.com, and eBay, put together.

At the time, at least a third of Chinese internet users had bought something on Taobao or Tmall within a year. Alibaba called these people active buyers, and each of them placed an average of 52 orders a year.

Then both the e-commerce business and the share price slid badly. In fiscal 2015 (April 1 to the following March 31), Alibaba's revenue growth fell from 52% to 45%.

Alibaba changed CEOs, with Daniel Zhang replacing Jonathan Lu. Executives, Jack Ma among them, kept vouching for the company's results and its future growth. But the second-quarter 2015 report showed revenue up 28% year on year and China retail sales up 34% — both key figures below what analysts had expected on average, and the slowest quarter of growth in three years.

Wall Street's disappointment was close to its peak: investors sold Alibaba shares at lower and lower prices, until in August 2015 the stock fell below its IPO price of $58.16. The company had lost more than 40% of its market value.

From 2016 Alibaba started making content. Through channels like Weitao (something like Weibo and WeChat official accounts) and Ask Everyone (a shopping community), it invited Taobao merchants and partners to write articles or shoot videos recommending products, and took a cut of the sales. Content was a way to keep people around and then turn them into the numbers it wanted to report.

In a year, e-commerce revenue from Taobao and Tmall rose 45%, to 138.8 billion yuan.

Amazon's e-commerce business spans the globe, but its biggest source of revenue is still e-commerce at home in the US, and its entire international operation still loses money.

In the US it has few competitors left: for every $100 Americans spend shopping online, $43 goes to Amazon. US e-commerce keeps driving the company's results and its profit, and pays for the loss-making e-commerce business everywhere else.

So you can see clearly that Amazon has a steeply rising revenue curve and a profit line that hovers around zero.

Their shoppers keep getting harder to pry loose

Both platforms hold on to their users.

When people still relied on computers, search results and homepage placement were the main ways to draw shoppers in.

Once the phone became the thing people carry everywhere, shoppers started opening a shopping app directly instead of searching the web.

Which means the companies already in front keep pulling further ahead.

Alibaba keeps people around with content marketing — social features and shopping guides. According to CEO Daniel Zhang, speaking in 2016, Taobao was opened seven times a day on average after it added social features.

That stickiness converts into spending. In the second quarter of this year, Alibaba's revenue per buyer rose from 202 yuan to 273 yuan.

Once shopping habits have been formed, Alibaba does not need to spend much to lift revenue during a big event like Singles' Day.

Even during JD.com's own June 18 sale, Alibaba's costs stay lower.

Amazon puts as much revenue as it can into new businesses, so its profit is always small. Its hold on users shows up in membership instead: more than half of them now pay $99 a year for Prime and free two-day delivery.

Guggenheim Securities analyst Robert Drbul used that to estimate that Amazon has about 65 million paying members. John Blackledge of Cowen & Co. arrived at a larger number of subscribers worldwide, close to 80 million.

Amazon charges $5 for its slowest delivery, five to eight days. A Prime member who signs up mainly for free shipping has to place 20 orders a year to break even.

That figure means nearly half of American online shoppers are committing to 20 orders from Amazon within a year.

In practice they probably buy more. One study found that Prime members may spend two to three times as much on Amazon as ordinary users.

Alibaba has been slower than Amazon at opening new businesses

Amazon is without question the world's largest cloud computing provider, with more than 30% of the market — more than Microsoft and Google, the second and third largest, combined.

Alongside e-commerce, this is the other Amazon business its rivals envy.

Bezos kept the numbers for it buried inside complicated financial reports, so no one knew how big it was or whether it made money. In the first quarter of 2015, Amazon disclosed AWS's results for the first time: 6% of revenue, but more profit than all the company's other businesses combined.

No one had expected AWS to make that much. The day the numbers came out, Amazon's market cap jumped $25.6 billion. After that, AWS and US e-commerce together became Amazon's source of profit, a steady supply of cash for its enormous investments in Europe, India, and logistics.

Another new Amazon business finding its feet is the Echo smart speaker, already a billion-dollar line for the company. Echo products sold better than anything else during last year's Thanksgiving and Christmas sales and this year's Prime Day.

The investment bank Mizuho expects sales of Echo hardware and the built-in Alexa voice assistant to bring Amazon $11 billion in revenue by 2020.

Every major technology company is now trying to make the smart speaker its way in.

Revenue from these technology businesses is what funds Amazon's $5 billion push into India.

Alibaba started investing in cloud computing earlier, and more heavily, than any other large Chinese company. Alibaba Cloud began operating as an independent subsidiary in 2009.

Since 2015 its revenue has grown by triple digits in almost every quarter. Its losses have narrowed to 4%, but they are still losses.

And that is with government policy keeping foreign cloud competitors out of China.

The Alibaba Digital Media and Entertainment Group it set up in the second half of last year has already lost 4.8 billion yuan. The games business it is about to enter puts it directly against Tencent, the largest games company in the world, which has already spent tens of billions of dollars buying game developers and publishers around the globe.

Both companies are moving into offline retail

From shopping malls to fresh-food supermarkets to convenience stores large and small, the physical retail that e-commerce once set out to replace has not disappeared. It has become e-commerce's partner.

Here Alibaba has moved faster than Amazon.

Leaving aside the million convenience stores (a projected figure) it keeps adding, Alibaba has already built ties with several hundred offline supermarkets and convenience stores through equity stakes and partnerships.

In August 2015, Alibaba announced it was putting 28.3 billion yuan into Suning to become its second-largest shareholder. Suning in turn spent 14 billion yuan on newly issued Alibaba shares. Each side committing more than 10 billion yuan to holding the other's stock says how much both value the partnership.

In several other 10-billion-yuan investments, Alibaba has consistently taken stakes in the leading companies of industries it is bad at, to fill the holes: wherever it lacks supply-chain capacity or experience in a category, that is where the money goes.

It took Intime private for nearly 20 billion yuan and announced a strategic partnership with Bailian. Facing JD.com online and off, Alibaba has to find its next way of getting shoppers to spend.

The Tmall convenience stores it has been opening recently are, at bottom, a way into the wholesale business — a new channel in second-, third-, fourth-, and fifth-tier cities.

For the same reason, to reach the people who have never got into the habit of buying fresh food online, Alibaba opened Hema.

With seafood, or the more ordinary fruit, vegetables, and meat, what a shopper sees on an e-commerce page and what arrives at the door are often two different things. Cold-chain delivery as it stands is still not good enough to make people trust buying fresh food online.

The market has mostly taken these experiments well.

In July, news that Alibaba's cashierless supermarket was about to open sent the unmanned-retail stocks on China's A-share market up across the board. Xinkaipu, for one, rose 9.98% within five minutes of the open on July 5. Shensi Electronic, Kelan Software, Minde Electronic, and Huinar Technology, all attached to the same theme, closed up the 10% daily limit.

The rally may say more about A-share investing culture, which chases hot themes. Any company linked to one gets bid up, whether or not it would actually gain once a giant like Alibaba enters its market.

Amazon has tried similar things, more slowly, but once it settled on a direction it spent enormously.

In 2014 it planned a physical store in midtown Manhattan that would handle brand promotion, returns and exchanges, and double as a small warehouse. What opened in 2015 was a small delivery center tucked into an office building across from the Empire State Building — not a store, not a convenience shop.

On street-corner shops selling fresh food, groceries, and household goods, Amazon has kept experimenting without settling on a format.

Then, in July, it spent $17.7 billion on Whole Foods. It is the largest acquisition in Amazon's history and the fourth-largest deal in the history of US retail. With more than 460 Whole Foods stores, Amazon became the fifth-largest grocery retailer in the country.

Shares in Walmart, Kroger, Costco, and other big US supermarket chains fell hard the moment the news broke.

The market is afraid that having beaten them online, Amazon now wants to beat them on everything ordinary people buy. In retail, Amazon wants to be the main seller of goods, no matter how shoppers choose to shop in the future.

The same thing happened again last week.

CNBC reported on Friday that Amazon would decide before Thanksgiving whether to enter the prescription drug market, worth several hundred billion dollars. It is a business Amazon is only considering, and that was enough to knock about 5% off the shares of drugstore chains like Walgreens, CVS, and Rite Aid.

In short, the biggest companies keep getting bigger

Seven of the world's ten largest companies today are technology companies.

Each dominates a market. Besides Alibaba and Amazon: Apple owns high-end hardware, Google owns search, Microsoft all but owns enterprise software services, and Facebook and WeChat own social networking in their respective worlds.

Beyond the e-commerce and payment platforms Chinese consumers cannot avoid, Alibaba's reach also runs through the shares it holds in a long list of listed companies. Count those investments and its stake in Ant Group, and its overall valuation has already passed Amazon's.

Leads this large mean that in most cases the rise of a new company ends up strengthening the giants' position rather than threatening it.

Geoffrey G. Parker, a business professor at Tulane University, put it this way: “To some extent, a lot of R&D costs are being borne by companies outside these tech giants, which lets the giants do a better job developing their own products.”

Disrupting them keeps getting harder.

Charts by Feng Xiuxia

Cover image: Thermo Fisher Scientific