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ALIBABA!VS.!AMAZON!

Does!Amazon!need!to!worry!about!the!aspiring!
Alibaba?!
Fundamentals!of!Corporate!Finance!
ZHONG!Ninghua!

written!by!BOULANGER!Guillaume,!DAM!Thuy!Mi,!MAIKATH!Joline!
October!09,!2015!

Fundamentals!of!Corporate!Finance,!ZHONG!Ninghua!

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Alibaba!vs.!Amazon!
Which%company%has%the%better%conditions%to%be%the%leader%of%the%electronic%commerce%market%
in%the%world?%To%answer%this%question,%we%need%to%look%at%some%important%facts%about%those% two%companies%first.% This%report%will%compare%the%latest%financial%statement%from%the%annual%reports%of%Alibaba%Group%
Holding% Ltd.% with% the% peer% company% Amazon.com.% In% order% to% understand% the% difference% or% similarity%between%these%two%companies,%we%will%introduce%their%main%business%model%and%of% course%the%financial%statements.%Subsequently,%the%report%is%closed%with%our%own%conclusion% and%the%appendix.%% %
Introduction*of*Alibaba*and*Amazon*
Alibaba%Group%Holding%Ltd.%was%founded%in%China,%Hangzhou%by%the%former%English%teacher%
Jack%Ma%in%1999.%In%China's%eLcommerce%market,%Alibaba%with%its%many%network%platforms%is%
already% the% dominant% company.% Its% business% model% consists% of% its% largest% platform% Taobao% which%is%a%customerLtoLcustomer%(C2C)%marketplace%cooperating%in%China%(brings%small%and% private%sellers%with%private%buyers%together%on%a%free%platform),%Tmall%L%a%businessLtoLcustomer%
(B2C)%marketplace%in%China%for%larger%retailer%(Nike,%Apple,%etc.),%1688.com%L%a%businessLtoL
business%(B2B)%wholesale%marketplace%in%China,%Juhuasuan%L%offers%a%limited%time%discounted% sale% on% quality% products% for% consumers,% AliExpress% L% a% global% consumer% marketplace% for% consumers%around%the%world%and%Alibaba.com%L%a%B2B%marketplace%focusing%on%global%trade% among%businesses%around%the%world.%Aside%from%these%platforms,%the%company%offers%Alibaba8
Cloud8 Computing% (including% elastic% computing,% database% services% and% storages,% and% large% scale%computing%services)%and%Payment8Services%on%its%marketplaces%through%Alipay.com%Co.,% Ltd.%whom%they%retain%a%beneficial%relationship.%The%company's%philosophy%is%"meet,%work,%live%
@Alibaba"% and% they% aim% to% meet% this% vision.% At% the% moment,% its% whole% business% success% depends%on%their%seller's%success.%For%this%reason,%they%seek%to%help%their%sellers%and%created% Alimama%L%a%marketing%consulting%departement.%The%revenue%consists%of%membership%fees%for% the%sellers%(different%packages%let%them%organize%their%storefront%easier),%online%marketing%fees% (e.g.%the%more%they%pay,%the%higher%their%products%will%be%listed%on%Taobao),%commissions%on% transactions,%storefront%fees%and%cloud%computing%service%fees.%Alibaba's%business%is%focused% on%helping%small%businesses%because%there%is%not%any%wellLestablished%large%retailer%in%China.%
For%the%future,%they%are%planning%to%expand%their%business%into%different%and%new%fields.%Last%
year%the%company%invested%with%approximately%60%%equity%interest%in%Alibaba8Pictures8Group8
Ltd.%(formerly%known%as%ChinaVision%Media%Group%Ltd.)%to%fulfill%the%vision%of%offering%media%
entertainment% to% its% customers.% This% was% only% one% example% of% many% other% company% acquisitions% for% the% longLterm% success.% While% Alibaba% concentrates% on% smaller% businesses,%
Amazon.com%focuses%on%larger%retailers%and%brands%in%the%United%States.%%

Fundamentals!of!Corporate!Finance,!ZHONG!Ninghua!

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Amazon.com% was% founded% in% the% United% States,% Washington% by% the% computer% scientist% Jeff%
Bezos%in%1994.%It%counts%as%one%of%the%largest%eLcommerce%companies%in%the%world.%Its%business%
model%consists%of%the%online%Marketplace,%Amazon8Prime%and%Amazon8Web8Services.%On%the% marketplace,%similiar%to%Alibaba,%Amazon%brings%the%seller%and%buyer%together%but%mostly%sells% the%products%directly%to%customers.%Compared%to%Alibaba%they%have%less%incentives%to%contribute% to%its%seller's%success%because%they%are%more%focused%on%bringing%the%products%to%the%buyer% directly%and%seek%for%its%buyer%satisfaction.%The%eLbook%Kindle%is%one%of%its%own%digital%device% products%which%the%company%developed%and%sell%around%the%world.%In%addition,%customers%can% buy%the%Amazon8Prime%membership%to%get%many%advantages%such%as%faster%shipping,%Prime8
Instant8 Video% (an% online% unlimited% video% and% tv% show% streaming% portal)% and% Prime8 Music%
(unlimited%music%streaming).%Furthermore,%Amazon8Web8Services,%which%resembles%Alibaba8
Cloud8 Computing,% offers% cloud% storage% and% computer% resources.% Amazon% gets% its% main% revenue%from%sales%commissions%(selling%a%wide%range%of%products),%membership%fees,%its%own% developed%digital%devices%and%its%providing%services.%Since%it%sells%the%products%to%the%buyers% directly,%there%are%enormous%costs%for%holding%inventory%and%lead%to%impairment%of%its%profit.% While% Alibaba% focuses% on% improving% its% seller's% success,% Amazon% seeks% to% be% earth's% most% customer% centric% company.% The% customer% satisfaction% is% the% most% important% goal% of% the% company.%Amazon%wants%to%succeed%in%the%longLterm%and%puts%lots%of%investments%in%different% projects.%Amazon8Prime%used%to%be%a%longLterm%project%a%few%years%ago%and%they%spent%lots%of% money% as% well% and% now% it% is% an% attractive% revenue% due% to% the% increasing% number% of% memberships.%Even%though%they%spend%so%much%money,%the%investors,%carefully%watching%the% achievements,%have%faith%in%the%company.%
%

According%to%the%business%models%of%Alibaba%and%Amazon,%they%are%mostly%different.%Only%a% few%arms%are%similar,%e.g.%Alibaba8Cloud8Computing%and%Amazon8Web8Services.%Amazon,%as% an% international% eLcommerce% company,% sells% the% products% directly% and% has% larger% costs% for% inventory%storage.%Alibaba%provides%the%different%platforms%and%has%costs%in%terms%of%supporting% its%seller's%success%but%functions%mostly%in%China.%Jack%Ma,%the%CEO%of%Alibaba,%made%clear% that%he%aims%to%expand%into%the%US%market%and%even%beyond.%If%he%makes%it%true,%the%company% will%have%to%expand%in%the%US%and%this%leads%to%impairment%of%cost%advantages%regarding%e.g.% employment% costs.% As% a% relatively% new% public% listed% company,% they% have% lots% of% potential.%
Alibaba%wants%to%grow%in%the%entertainment%section^%Amazon%already%started%in%this%business%
with%Prime8Instant8Video%and%Prime8Music.%Among%other%things,%Amazon%wants%to%grow%in%its% shipping%service.%The%company%is%testing%the%new%idea%of%two%hours%delivery%in%some%regions% of%the%United%States.%The%different%visions%and%progress%of%the%two%companies%make%it%difficult% to%completely%compare%them,%but%if%Alibaba%really%has%the%ability%to%expand%outside%of%China,% Amazon%needs%to%take%more%caution.%To%investigate%deeper%into%the%current%financial%situations,%

Fundamentals!of!Corporate!Finance,!ZHONG!Ninghua!

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we%will%compare%the%financial%statements%now.%For%an%overview,%we%will%start%with%the%commonL sized%balance%sheet%of%both%companies.% %
Common3size*Balance*Sheet*
Alibaba*Group*Holding*Ltd.*
Assets*
Current%assets:%
Cash%and%cash%equivalents%
ShortLterm%investments%
Restricted%cash%and%escrow%receivables%Loan%receivables,%net%
Investment%securities%
Prepayments,%receivables%and%other%assets%%
Total*current*assets**
%
Investment%securities%
Prepayments,%receivables%and%other%assets%
Investment%in%equity%investees%
Property%and%equipment,%net%
Land%use%rights%
Intangible%assets%
Goodwill%%
Total*assets**
%
Liabilities,*Mezzanine*Equity*and*Shareholders’*Equity*
Current%liabilities:%
Current%bank%borrowings%
Secured%borrowings%
Income%tax%payable%
Escrow%money%payable%
Accrued%expenses,%accounts%payable%and%other%liabilities%Merchant%deposits%
Deferred%revenue%and%customer%advances%%
Total%current%liabilities%%
Deferred%revenue%
Deferred%tax%liabilities%
NonLcurrent%bank%borrowings%
Unsecured%senior%notes%
Other%liabilities%
Total*liabilities**
%
Commitments%and%contingencies%%
Mezzanine%equity:%
Others%%
Total*mezzanine*equity**
%
Alibaba%Group%Holding%Limited%shareholders’%equity:%
Additional%paidLin%capital%
Treasury%shares%at%cost%
Restructuring%reserve%
Subscription%receivables%
Statutory%reserves%
Accumulated%other%comprehensive%income%%
Cumulative%translation%adjustments%
Unrealized%gain%on%availableLforLsale%investment%securities,%interest%rate%swaps%and%others%%
Retained%earnings%
Total%Alibaba%Group%Holding%Limited%shareholders’%equity%
Noncontrolling%interests%
Total*equity*
Total*liabilities,*mezzanine*equity*and*equity**

$*
%17,453%%
%2,282%%
%371%%
%135%%
%590%%
%2,094%%
*22,925**
%
%2,357%%
%659%%
%5,465%%
%1,474%%
%501%%
%1,061%%
%6,764%%
*41,206**
%
*
%321%%
%
%441%%
%
%3,199%%
%1,162%%
%1,277%%
%6,400%%
%72%%
%725%%
%260%%
%7,903%%
%347%%
*15,707**
%
/%
%
%106%%
106*
%
%
%18,897%%
/%
%L%186%%
%L%66%%
%438%%
/%
%L%177%%
%549%%
%4,007%%
%23,462%%
%1,931%%
*25,393**
*41,206**

(in*millions)*

%**
42.36%
5.54%
0.90%
0.33%
1.43%
5.08%
55.64*
%
5.72%
1.60%
13.26%
3.58%
1.22%
2.57%
16.42%
100.00*
%
%
0.78%
%
1.07%
%
7.76%
2.82%
3.10%
%
0.17%
1.76%
0.63%
19.18%
0.84%
38.11*
%
%
%
0.26%
0.26*
%
%
45.86%
%
L0.45%
L0.16%
1.06%
%
L0.43%
1.33%
9.72%
56.94%
4.69%
61.62*
100.00*

%
Comparing% the% two% commonLsize% balance% sheet,% we% notice% that% the% total% assets% of% Alibaba%
Group%Holding%Ltd.%is%slightly%smaller%than%the%total%assets%of%Amazon.com.%According%to%this,%
we%could%assume%that%Amazon%has%more%value%than%Alibaba%but%we%cannot%do%that%without% deeper%knowdledge%of%the%financial%situation%by%analyzing%the%ratios%in%a%later%part.% %
*

Fundamentals!of!Corporate!Finance,!ZHONG!Ninghua!

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Amazon.com*
Assets*

$*
%
14,557%
2,859%
8,299%
5,612%
31,327*
16,967%
3,319%
2,892%
54,505*
%
$*
%
16,459%
9,807%
1,823%
28,089*
8,265%
7,410%
%
%
/%
/%
%
/%
/%
5%
L%1,837%
11,135%
L%511%
1,949%
10,741*
54,505*

%*
%
26.70%
5.25%
15.23%
10.30%
57.48*
31.13%
6.09%
5.30%
100.00*
%
%*
%
30.20%
17.99%
3.34%
51.53*
15.16%
13.60%
%
%
%
%
%
%
%
0.00%
L%3.37%
20.43%
L%0.94%
3.58%
19.70*
100.00*

(in*millions)*

Current%Assets:%
Cash%and%cash%equivalents%
Marketable%securities%
Inventories%
Accounts%receivable,%net%and%other%
Total*current*assets*
Property%and%equipment,%net%
Goodwill%
Other%assets%
Total*Assets*
*
Liabilities*and*Stockholders'*Equity*
Current%Liabilities:%
Accounts%payable%
Accrued%expenses%and%other%
Unearned%revenue%
Total*current*liabilities*
LongLterm%debt%
Other%longLterm%liabilites%
Stockholders'%equity:%
Preferred%stock,%$0.01%par%value:%
Authorized%shares%L%500%
Issued%and%outstanding%shares%L%none%
Common%stock,%$0.01%par%value:%
Authorized%shares%L%5,000%
Issued%shares%%488%and%483%
Outstanding%shares%L%465%and%459%
Treasury%stock,%at%cost%
Additional%paidLin%capital%
Accumulated%other%comprehensive%loss%
Retained%earnings%
Total*stockholders'*equity*
Total*liabilities*and*stockholders'*equity*

%
Common3size*Income*Statement*
Alibaba*Group*Holding*Ltd.*
*

$

%*

(in*millions)* *

Revenue**
Cost%of%revenue%
Product%development%expenses%
Sales%and%marketing%expenses%
General%and%administrative%expenses%%
%Amortization%of%intangible%assets%
%Impairment%of%goodwill%and%intangible%assets%
Yahoo%TIPLA%amendment%payment%%
Income*from*operations**
Interest%and%investment%income,%net%%
Interest%expense%
Other%income,%net%%
Income*before*income*tax*and*share*of*results*of*equity*investees**
Income%tax%expenses%
Share%of%results%of%equity%investees%%
Net*income**

%

Net%income%attributable%to%noncontrolling%interests%%
Net*income*attributable*to*Alibaba*Group*Holding*Limited**
Accretion%of%Convertible%Preference%Shares%%
Dividends%accrued%on%Convertible%Preference%Shares%%
Net*income*attributable*to*ordinary*shareholders**

12,293% %
L3,845%
L1,720%
L1,373%
L1,258%
L337%
L28%
%
3,732%
1,525%
L443%
401%
5,215%
L1,035%
L257%
3,923*

L31.28%
L13.99%
L11.17%
L10.23%
L2.74%
L0.23%
30.36%
12.41%
L3.60%
3.26%
42.42%
L8.42%
L2.09%
31.91*

L9%
3,914%
L2%
L16%
3,896%

L0.07%
31.84%
L0.02%
L0.13%
31.69%

%

Amazon.com*
***
Net%product%sales%%
Net%service%sales%
Total*net*sales**
Operating%expenses%(1):%%
Cost%of%sales%
Fulfillment%
Marketing%
Technology%and%content%
General%and%administrative%
Other%operating%expense%(income),%net%%
Total%operating%expenses%%
%
Income%from%operations%%
Interest%income%
Interest%expense%
Other%income%(expense),%net%%
Total%nonLoperating%income%(expense)%
Income%(loss)%before%income%taxes%
Provision%for%income%taxes%
EquityLmethod%investment%activity,%net%of%tax%%
Net*income*(loss)**

$*
70,080% %
18,908% %
88,988* *
%
62,752%
10,766%
4,332%
9,275%
1,552%
133%
88,810%
%
178%
39%
L210%
L118%
L289%
L111%
L167%
37%
3241*

(in*millions)*

%

%

%*

70.52%
12.10%
4.87%
10.42%
1.74%
0.15%
99.80%
0.20%
0.04%
L0.24%
L0.13%
L0.32%
L0.12%
L0.19%
0.04%
30.27*

Fundamentals!of!Corporate!Finance,!ZHONG!Ninghua!

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The%first%characteristic%about%those%two%tables%you%will%notice%are%the%completely%different%net% income.%While%Alibaba%has%a%net%income%of%$USD%3,923million,%Amazon%has%a%loss%of%$USD% 241million.%With%a%deeper%research%into%the%past%of%Amazon's%business%history,%we%will%know% that%the%company%is%continuously%investing%lots%of%money%for%a%longLterm%success.%If%they%have% only%perfected%the%business%they%already%established%and%cut%off%their%investments,%they%would% have%an%increasing%net%income.% %
Ratio*Analysis*
In%the%following%we%are%going%to%compare%some%important%ratios%for%Alibaba%Group%Holding%Ltd.% and%Amazon.com,%Inc.%by%referring%to%their%latest%annual%reports.%Since%both%companies%use% different%fiscal%years%L%ending%on%every%March%31%for%Alibaba%but%on%December%31%for%Amazon%
L%we%decided%to%compare%Alibaba's%financial%data%of%the%financial%year%that%ended%on%March%31,%
2015%to%the%financial%data%from%Amazon%in%2014.%
%
Firstly,%we%have%a%look%at%some%significant%shortLterm%liquidity%ratios:%
!!
(Year&Ended&31/03/2015)& (Year&Ended&31/12/2014)&
!!
Alibaba!
Amazon!
Current!ratio!
3.58!times!
1.12!times!
Cash!ratio!
2.73!times!
0.82!times!
NWC!to!total!assets!
40%!
5.94%!
(See%appendix%for%exact%calculations)%

Both%companies%have%current8ratios%bigger%than%1.0%times,%which%means%that%they%have%more% than%1$%in%current%assets%for%every%1$%in%current%liabilities.%This%indicates%relatively%good%short% term%liquidity%since%all%current%liabilities%could%be%paid%back%within%12%months%(or%earlier).%One% can% derive% from% the% table% that% Alibaba's% current% ratio% is% more% than% three% times% the% one% of%
Amazon.%This%statement%is%also%valid%for%the%cash%ratio.%Therefore,%Alibaba%is%obviously%much%
more%liquid%in%the%short%term%than%Amazon,%especially%when%it%comes%down%to%cash%or%cash% equivalents.%However,%holding%a%lot%of%cash%does%not%necessarily%need%to%be%a%positive%aspect% since%it%might%be%related%to%opportunity%costs%when%the%money%could%bring%in%more%profit%when% being%invested%elsewhere.%Another%measure%to%capture%shortLterm%solvency%is%the%NWC8to8total8 assets8ratio.%A%company's%net8working8capital%(which%is%defined%as%the%gap%between%current% assents%and%current%liabilities)%is%often%regarded%as%its%amount%of%shortLterm%liquidity.%Alibaba's% NWC8to8total8assets8ratio%of%40%%is%extremely%high%whereas%the%equivalent%value%for%Amazon% of%only%6%%is%quite%low%(at%least%in%comparison%to%Alibaba).%% After% comparing% these% ratios,% one% can% come% to% the% conclusion% that% Alibaba% is% being% more% successful%at%managing%its%current%accounts%than%Amazon.%% %
%

Fundamentals!of!Corporate!Finance,!ZHONG!Ninghua!

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Next,%some%longLterm%solvency%measures%shall%be%discussed.%
!!
(Year&Ended&31/03/2015)& (Year&Ended&31/12/2014)&
!!
Alibaba!
Amazon!
Total!debt!ratio!
0.38!times!
0.80!times!
DebtZequity!ratio!
0.61!times!
4.07!times!
Equity!multiplier!
1.61!times!
5.07!times!
LongZterm!debt!ratio!
0.27!times!
0.59!times!
TIE!
12.75!times!
0.47!times!
%
In% their% last% fiscal% year,% Alibaba% and% Amazon% used% 38%% and% 80%% debt,% respectively.% Given% these%numbers,%one%can%calculate%the%debtLequity8ratio%and%the%equity8multiplier%forthwith.%For% each%dollar%in%equity,%Amazon%had%~4$%in%debt%while%Alibaba%only%had%~0.6$%in%debt.%Alibaba%is% obviously% using% less% debt% which% makes% it% less% likely% for% the% company% to% experience% credit% problems.%However,%using%more%debt%can%increase%ROE%(Return%On%Equity)%but%this%aspect%will% be% discussed% later.% The% longLterm8 debt8 ratio% puts% more% focus% on% a% firms% debt% management% policy%by%neglecting%shortLterm%debt.%Amazon%used%59%%longLterm%debt%its%latest%financial%year,% more%than%double%the%amount%Alibaba%used%(which%is%only%27%).%Another%remarkable%difference% can%be%found%when%having%a%look%at%the%times8interest8earned8ratio.%Alibaba%had%its%interest% expenses%covered%almost%13%times%over,%while%Amazon's%TIE8ratio%is%smaller%than%1.0%times% indicating%that%the%firm's%interest%expenses%aren't%even%covered%once.%Thus,%Amazon%might%face% some%difficulties%in%meeting%interest%payments.%
%
Thirdly,%we%shortly%want%to%mention%some%ratios%measuring%an%enterprise's%efficiency%in%using% its%assets.% !!
(Year&Ended&31/03/2015)& (Year&Ended&31/12/2014)&
!!
Alibaba!
Amazon!
NWC!turnover!
0.74!times!
27.48!times!
Total!asset!turnover!
0.3!times!
1.63!times!
%
Here,% we% can% find% that% Amazon% seems% to% be% performing% better% at% asset% utilization.% Its%NWC8 turnover% is% ~37% times% that% of% Alibaba% (mostly% as% a% result% of% Amazon's% low% NWC% and% high% revenue).%From%this%one%can%deduce%that%Amazon%is%very%efficient%in%gaining%profit%out%of%its%net8 working8capital.%Also,%Amazon's%total8asset8turnover%is%~5%times%the%one%of%Alibaba:%For%1$%in% assets,%Amazon%generated%1.63$%in%sales%whereas%Alibaba%only%generated%0.3$%in%sales.% To%continue,%we%now%introduce%three%profitability%measures%of%great%significance:%%
!!
!!
Profit!Margin!
ROA!
ROE!
%

(Year&Ended&31/03/2015)& (Year&Ended&31/12/2014)&
Alibaba!
Amazon!
31.91%!
Z0.27%!
9.52%!
Z0.44%!
15.45%!
Z2.24%!

Fundamentals!of!Corporate!Finance,!ZHONG!Ninghua!

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The% first% thing% to% notice% is% that% all% these% ratios% are% negative% for% Amazon,% resulting% from% the% company's%negative%net%income%in%2014.%A%negative%net%income%indicates%a%financial%loss%as% the%firm's%costs%exceeded%the%amount%of%revenue%it%was%able%to%bring%in%over%the%past%year.%
Since% the% calculations% of% profit8 margin,% ROA% and% ROE% are% all% based% on% net% income% as% numerator,%a%negative%net%income%automatically%plugs%in%a%negative%value%for%all%three%ratios.% While% Alibaba% generated% a% profit% ~32% cents% in% every% dollar% of% sales% and% 9.5% cents% for% every% dollar% in% assets,% Amazon% lost% 0.27% cents% and% 0.44% cents,% respectively.% The% return8 on8 equity%
(ROE)% is% a% measure% of% how% much% profit% a% company% generates% for% its% shareholders% and% investors.%A%negative%ROE%means%that%investors%are%likely%to%lose%money%on%every%dollar%they% hold%in%equity.%This%might%also%bring%in%negative%consequences%in%the%longLterm%since%some% investors%who%fear%to%lose%more%money%could%pull%finances%from%the%company%which%again%is% harmful%to%the%business%and%might%result%in%a%vicious%circle.%However,%since%Amazon's%2013%net% income%was%positive,%it%is%possible%or%even%likely%that%this%state%is%only%temporary%and%that%the% company%can%reduce%its%costs%in%the%future%or%gain%more%sales%as%a%result%of%positive%investment% impacts.%Alibaba,%on%the%other%hand,%has%a%relatively%high%value%of%ROE%which%might%be%a%hint% to%a%good%cost%structure.%
Finally,%we%come%to%discuss%some%market%value%measures.%Therefore,%we%need%some%data%that%
is%not%contained%in%the%financial%statements,%%
!!
!!
EPS!
P/E!ratio!
P/S!ratio!
MarketZtoZBook! ratio! (Year&Ended&31/03/2015)& (Year&Ended&31/12/2014)&
Alibaba!
Amazon!
1.57!$!
!Z!0.5!$!
23.72!(Oct!7)!
/!
16.92!(Oct!7)!
1.61!(Oct!7)!
5.41!(Oct!6)!

21.61!(Oct!6)!

%
Amazon's% negative% net% income% in% 2014% also% results% in% negative% earnings8 per8 share.% Thus,%
Amazon's%P/E%ratio%would%be%negative.%However,%we%do%not%calculate%negative%P/E8ratios%since%
this% ratio% measures% how% much% an% investor% is% willing% to% pay% for% one% dollar% in% earnings% and% a% negative% value% would% make% no% sense% for% obvious% reasons.% Currently% (Oct% 6% 2015),% Alibaba% shares% sell% for% $63.93% (http://www.nasdaq.com/symbol/baba/peLratio)% while% Amazon's% share% price%is%$543.68%(http://www.nasdaq.com/symbol/amzn/peLratio).%If%Amazon%had%a%positive%net% income,%it's%priceLearnings8ratio%would%be%much%higher%than%Alibaba's.%However,%Alibaba%also% has%quite%a%high%P/E8ratio%which%can%be%taken%as%an%indicator%for%future%growth%prospects.%As% an% alternative,% one% can% also% look% at% the% priceLsales8 ratio% which% is% much% higher% for% Alibaba,% mostly%due%to%its%lower%sales.%Another%important%ratio%to%mention%is%the%marketLtoLbook8ratio.% Both%companies%have%remarkably%high%marketLtoLbook8ratios%but%Amazon's%is%almost%four%times% the% one% of% Alibaba,% so% one% can% deduce% that% Amazon% has% been% extremely% successful% in% generating%value%for%its%stockholders.% Fundamentals!of!Corporate!Finance,!ZHONG!Ninghua!

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!

Alibaba*Group*Holding*Ltd.***Du*Pont*Chart*(Year*Ended*March*31,*2015)*(in*millions)*

%
*
Amazon.com,*Inc.****Du*Pont*Chart*(Year*Ended*December*31,*2014)*(in*millions)*

%

Fundamentals!of!Corporate!Finance,!ZHONG!Ninghua!

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!

!

In%the%following%section,%we%are%going%to%have%a%closer%look%at%the%financial%structure%of%Alibaba%
Group%Holding%Ltd.%and%Amazon.com,%Inc.%by%examining%the%Extended8Du8Pont8Charts%for%both%
companies.%Through%decomposition%of%the%ROE%in%three%parts,%namely%profit8margin,%total8asset8 turnover%and%equity8multiplier,%we%may%for%example%be%able%to%evaluate%the%reasons%for%Amazon% to%have%a%negative%ROE.%%
The%profit8margin%is%calculated%as%net%income%divided%by%sales%(or%revenue).%We%can%see%from%
the% charts% that% even% though% Amazon's% revenue% is% more% than% seven% times% the% revenue% of%
Alibaba,%it's%profit8margin%is%slightly%negative%whereas%Alibaba%has%a%high%32%%profit8margin.%
When%having%a%more%detailed%look%at%the%components%of%the%net%income,%especially%on%the%cost% structure%of%both%firms,%we%can%see%that%Amazon's%total%costs%amount%to%~9%times%the%costs%of% Alibaba%which%is%quite%a%significant%finding.%Amazon's%costs%of%sales%make%up%70%%of%its%total% costs^% however% for% Alibaba% it's% only% 37%.% Also,% most% of% the% other% expenses% of% Amazon% are% much%higher%than%those%of%Alibaba.%Since%its%costs%are%beyond%its%revenue,%Amazon%seems%to% be%performing%not%very%well%in%terms%of%operating%efficiency.%Generally%speaking,%Amazon%could% realize%a%positive%net%income%and%thus%increase%its%ROE%by%diminishing%some%costs.%On%the% other% hand,% one% could% also% assume% that% these% high% expenses,% e.g.% in% marketing% and% technology,%might%pay%off%in%the%future%in%the%form%of%higher%revenue.%% As%already%mentioned%in%the%ratio%analysis%earlier,%Amazon%is%more%efficient%in%asset%utilization,% appearing%in%its%higher%total8asset8turnover8ratio.%Alibaba%could%increase%its%total8asset8turnover% by%increasing%revenue%or%reducing%some%assets,%for%example%by%holding%less%cash^%however,% this%could%be%harmful%to%the%firm's%liquidity.%We%can%also%find%that%even%though%Amazon%holds% more%assets%(both%fixed%and%current)%than%Alibaba%L%which%is%mostly%due%to%the%fact%that%Alibaba% does% not% hold% inventory% and% less% property% and% equipment% L% its% total% asset% turnover% is% much% higher%than%Alibaba's%because%of%its%high%revenue.% Analyzing%both%company's%financial%leverage%by%referring%to%their%equity8multipliers,%one%can% suppose%that%Alibaba%could%increase%its%ROE%by%using%more%debt%(and%therefore%less%equity).% Nevertheless,%it%is%also%necessary%to%keep%in%mind%the%adverse%effect%which%is%higher%interest% expense,%decreasing%the%firm's%profit8margin.%%% After%having%analyzed%the%Extended8Du8Pont8Charts%for%Alibaba%and%Amazon,%we%now%have%a% better%understanding%of%their%financial%performance%and%were%able%to%bring%out%some%points%that% could%be%improved%(to%the%overall%goal%of%a%high%ROE%in%order%to%benefit%shareholders).%
%
Conclusion*

To%conclude,%we%try%to%connect%what%we%learned%from%our%financial%analysis%to%the% question%whether%Alibaba%can%be%seen%as%a%threat%for%Amazon.%% In%our%ratio%analysis%we%have%seen%that%Alibaba%held%a%lot%of%cash%and%used%little%debt% in%its%last%fiscal%year.%These%two%aspects%indicate%Alibaba's%potential%to%do%more% Fundamentals!of!Corporate!Finance,!ZHONG!Ninghua!

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investment%in%the%future,%e.g.%in%order%to%expand%internationally%and%accomplish%its% goal%to%gain%access%to%the%U.S.%market%or%to%expand%in%the%entertainment%industry.% Even%though%both%firms%have%quite%different%business%models,%some%parts%can%be% seen%as%equivalent.%For%example%Alibaba's%B2C%platform,%Tmall,%which%has%been% growing%rapidly%over%the%past%years,%is%likely%comparable%to%Amazon's%business% model.%If%Alibaba%will%reach%its%goal,%Amazon%would%indeed%have%a%new%strong% competitor%(in%the%U.S.%market)%and%may%be%threatened%through%Alibaba.%However,% the%future%is%unsure%and%we%can't%tell%when%or%even%if%this%will%happen%since%many% other%aspects%(such%as%an%already%established%eLcommerce%market%in%the%U.S.% market)%need%to%be%taken%into%consideration.%Therefore,%it%will%also%be%necessary%for% Alibaba%to%increase%its%efficiency%in%asset%utilization%which%is%very%poor%in%comparison% to%Amazon.%Amazon,%on%the%other%hand,%needs%to%improve%its%cost%structure%to% generate%positive%net%income%again.%%2014%wasn't%a%very%successful%year%for%Amazon,% at%least%regarding%profitability.%Anyway,%Amazon's%market%value%is%still%very%high%so% the%company%is%attractive%for%investors.%For%now,%Amazon%does%not%need%to%fear%
Alibaba%and%can%only%concentrate%on%increasing%its%profit.%Alibaba%has%a%long%way%to%
go%to%be%a%strong%competitor%for%Amazon.%%
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Shanghai%L%October%09,%2015%

Fundamentals!of!Corporate!Finance,!ZHONG!Ninghua!

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!

Appendix%
Ratios*3*Alibaba*

*

*

*

*

**

*

%

%

%

%

%

%

%

%

%

%

%

ShortLterm8Liquidity8measures:8
!"#!$%

%

current%ratio%=

%

quick%ratio%=%current%ratio%

%

cash%ratio%=

%

Net%working%capital%to%total%assets%=

%

Interval%measure%=

&%'(#

!$)!%&
&%'(#

%=%3,58%times%
%

%=%2,73%times%

!"#!$%*&%'(#
#++"&"

!"#!$%
(#&)&"-!$'+)-)+!&-()$$)/&'+

%

%=%40%%%

= 10214days%%

LongLterm8solvency8measures:8
#++"&"*!+("!&

%

Total%debt%ratio%=

%

DebtLequity%ratio%=

%

Equity%multiplier%=

%

LongLterm%debt%ratio%=

%

Times%Interest%Earned%ratio%=

#++"&"
$,&)
$,'#

%=%0,38%times% %

%

%=%0,61%times%

#++"&"
!+("!&

%=%1,61%times%
+('%!

+('%!-!+("!&

%

%

%

%

%=%0,27%times%

#&!&+-%"++-#")'
#(+$

%=%12,75%times%

Asset8management8ratios:8
('#$"

%

Receivables%turnover%=

%

Days'%sales%in%receivables%=

%

NWC%turnover%=

%

Fixed%asset%turnover%=

%

Total%asset%turnover%=

('#$"
!$#"&(

)&+-##%(

%=%24,33%times%

&'+
#",&&

%

%

%

%

%=%15%days%

%=%0,74%times%
('#$"
!!&&#+

('#$"
#++"&"

%=%0,67%times%

%=%0,3%times%

Profitability8measures:88
#"&#$

%

Profit%margin%=

%

Return%on%Assets%=

%

Return%on%Equity%=

('#$"

%=%0,3191%=%31,91%%
#"&#$

#++"&"
#"&#$

!+("!&

%=%0,0952%=%9,52%%%

%=%0,1545%=%15,45%%%%

Market8Value8Measures:8
#"&#$$$$$$$4:;<

%

EPS%=%

%

PriceLEarnings%ratio%=%23,72%(http://www.marketwatch.com/investing/stock/BABA/profile,%%07.10.2015)%

%

PriceLSales%ratio%=%16,92%(http://www.marketwatch.com/investing/stock/BABA/profile,%07.10.2015)%

%

MarketLtoLBook%ratio%=%

%

07.10.2015)%

*

#"%+"%%$&'

%=%9,75%RMB%(1,57$)% %

#"&&#
!&#!)

%=%1,84%times%(http://ycharts.com/companies/BABA/price_to_book_value,%

Fundamentals!of!Corporate!Finance,!ZHONG!Ninghua!

!

!

Ratios*3*Amazon*
ShortLterm8Liquidity8measures:8
Current%ratio%=%
Quick%ratio%=%
Cash%ratio%=%

&!&#(
#)$)%

%=%1,12%times%

&!&#(*)#%%
#)$)%

!"++(
#)$)%

%=%0,82%times%

%=%0,5182%times%

Net%working%capital%to%total%assets%=%

&!&#(*#)$)%
+"+$+

%=%5,94%%%

LongLterm8solvency8measures:8
Total%debt%ratio%=%

+"+$+*!$("!
+"+$+

DebtLequity%ratio%=%
Equity%multiplier%=%

$,)$#%
!*$,)$#%

+"+$+
!$("!

LongLterm%debt%ratio%=%

%=%0,8029%times%

%=%4,07%times%

%=%5,07%times%
)#'+-("!$

)#'+-("!$-!$("!

Times%Interest%Earned%=%

!()-&%*!!)
#!$

%=%0,5934%times%

%=%0,4714%times%

Asset8management8ratios:8
Inventory%turnover%=%

'#(+#
)#%%

%=%7,56%times%

Days'%sales%in%inventory%=%
Receivables%turnover%=%

&'+4=>?@
(,+'

))%))
+'!#

Days'%sales%in%receivables%=%
NWC%turnover%=%

))%))
&#&)

%=%48%days%

%=%15,86%times%
&'+4=>?@
!+,)'4

%=%23%days%

%=%27,48%times%

Fixed%assets%turnover%=%
Total%asset%turnover%=%

))%))
#&!()

))%))
+"+$+

%=%3,84%times%

%=%1,63%times%

Profitability8measures:8
Profit%margin%=%

*#"!
))%))

Return%on%Assets%=%
Return%on%Equity%=%

%=%L0,27%%%
*#"!

+"+$+

*#"!
!$("!

%=%L0,44%%%

%=%L2,24%%%

Market8value8measures:8
EPS%=%

*#"!$$$$$$4$
")&$$$$$$4@B>CD@4EFG@G>H=IHJ

%=%L0,5%$%

P/S%ratio%=%1,61%(http://www.marketwatch.com/investing/stock/AMZN/profile,%07.10.2015)%
MarketLtoLBook%value%=%21,36%(http://ycharts.com/companies/AMZN/price_to_book_value,%07.10.2015)%
%
%
%

!

Fundamentals!of!Corporate!Finance,!ZHONG!Ninghua!

!

!

!

Internetsources*
•% https://de.wikipedia.org/wiki/Alibaba_Group%(only%as%reference)%
•% https://de.wikipedia.org/wiki/Amazon.com%(only%as%reference)%
•% http://hsprod.investis.com/ir/alibaba/Alibaba_as_filed_20LF.pdf%(annual%report,%most% relevant%source)% •% http://phx.corporateL ir.net/External.File?item=UGFyZW50SUQ9MjgxMzI2fENoaWxkSUQ9LTF8VHlwZT0z &t=1%(annual%report,%most%relevant%source)%
•% http://www.investopedia.com/articles/investing/060415/10LfactsLyouLdidntLknowL aboutLamazon.asp%(2015/09/29)% •% http://www.investopedia.com/articles/investing/061215/differenceLbetweenLamazonL andLalibabasLbusinessLmodels.asp%(2015/09/29)% •% http://www.forbes.com/sites/helenwang/2015/07/08/whyLamazonLshouldLfearLalibaba/%
(2015/09/29)%
•% http://www.focus.de/finanzen/boerse/aktien/googleLappleLamazonLfacebookLalibabaL internetLinvestorLhinrichsLesLgibtLniemandenLderLamazonLdasLwasserLreichenL kann_id_4836798.html%(2015/09/29)%
•% http://www.faz.net/aktuell/finanzen/aktien/grafikLdesLtagesLalibabaLstelltLamazonLundL ebayLinLdenLschattenL12927633.html%(2015/09/29)% •% http://www.faz.net/aktuell/wirtschaft/unternehmen/wasLalibabaLvonLamazonL unterscheidetL13171747.html%(2015/09/29)% •% http://www.handelsblatt.com/unternehmen/handelLkonsumgueter/amazonLundL alibabaLwerLdasLrennenLmachenLwirdLnochListLesLnichtLausgemacht/11303812L3.html% (2015/09/29)%
%
Image*sources*
•% http://docs.alibabagroup.com/assets2/images/en/news/library_logos_alibababv_large. png%(2015/10/07)% •% http://www.svenLgiegold.de/wpLcontent/uploads/2015/01/amazon_logo_RGB.jpg%
(2015/10/07)%
%
Book*sources*
Stephan%A.%Ross,%Randolph%W.%Westerfield,%Bradford%D.%Jordan:%Fundamentals%of%Corporate%
Finance%(9th%Edition),%China%Machine%Press,%2010,%ISBN%0L07L338239L6%
%
%
%