2017 was a fantastic year for online retailers. Online shopping in the United States surpassed brick-and-mortar shopping on Black Friday for the first time. Online sales were up 17% from the year before, with 108.5 million Americans buying online.
As you know, this is a huge opportunity for investors. Amazon.com Inc.'s (Nasdaq: AMZN) stock will continue to climb, and struggling retailers will be profitable shorts.
But Amazon.com isn't even the biggest opportunity to make money in online retail growth. For that, just look at China...
While U.S. online sales are climbing, they are just a fraction of what is spent on China's "Singles' Day" - an anti-Valentine's Day holiday that happens to be the country's biggest shopping day of the year.
This year, one online retailer alone managed to pull in $25.3 billion in sales in just one day. That's almost four times the record $6.6 billion among all U.S. retailers on Cyber Monday.
In fact, that retailer cleared Amazon's Cyber Monday total in the first two minutes of Singles' Day.
And it's not just Singles' Day propelling this company's growth. Revenue in the most recent quarterly report (which did not include the record-breaking Singles' Day) climbed 61% from the previous quarter, and net income soared more than 100% from a year earlier.
Growth like this has prompted Money Morning Executive Editor Bill Patalon to call this company the "global e-commerce killer." And Money Morning Chief Investment Strategist Keith Fitz-Gerald said this is "the only company that can take on Team Bezos and may actually - dare I say it - win."
That's high praise from an expert who is very positive on Amazon stock.
This stock rose more than 95% last year, breaking records for a Chinese company as its market cap soared to about $485 billion.
We're talking about Alibaba Group Holding Ltd. (NYSE: BABA), a company that Americans often refer to as the "Amazon of China."
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But that comparison may do the Chinese juggernaut a disservice. Alibaba is much more than a copycat. And at this point, it might not be long before it's Amazon playing catch-up.
Neither online retailer is a bad bet. They're both riding one of the biggest growth trends of our time. But one of these two stocks is going to emerge as the growth leader. And there are reasons to believe it could be Alibaba.
Here are five of them...[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]
Reason No. 1: A Lean Business Model
Alibaba's seminal website, Alibaba.com, is actually not that similar to Amazon's. It's a business-to-business platform, an area in which Alibaba was a pioneer.
In 1999, Internet access was not widely available among Chinese consumers. Alibaba's founder, Jack Ma, had only acquired his first personal computer two years earlier. But he was fascinated by the Internet and wanted to bring it to China. So he began his business as a portal to connect Chinese manufacturers with the global marketplace.
The transactions were free: Alibaba made money from advertising. As traffic increased, Alibaba emerged as an international powerhouse, eventually creating Taobao, a consumer-to-consumer portal (like eBay), and later Tmall, a business-to-consumer portal (like Amazon).
From the beginning, Alibaba's operations have been largely software-based rather than warehouse-based. That model, which doesn't require heavy capital investments, is one reason Alibaba's operating margins are so stellar: about 33%, compared to Amazon's 2%.
In other words, Alibaba's growth has not come at the expense of profits.
Reason No. 2: Growth in Asia
China has been the major growth story of the past decade. The world's second-largest economy is still growing 6.6% a year, compared to 2.3% for the first largest (United States) and 1.2% for the third largest (Japan). Top Chinese tech companies are now in the same league as the American "Fab Five," with multiple Chinese stocks (including Alibaba) achieving $400 billion market caps in 2017.
Yearly growth in Chinese Internet users is around 6%. That's impressive in any country, but it's much more impressive when you consider that, in China, that means over 40 million new Internet users every year. That's more than the entire population of Canada or Australia.
That Internet user base is still just 54.3% of the world's most populous country, compared to 74.6% in the United States, which means there's still plenty of untapped upside for Alibaba in its home country. Alibaba controls 51% of the Chinese e-commerce market, which, according to Forbes, will account for 60% of the global market by 2020.
Alibaba has also been building its footprint in India, another giant country with an economy that Morgan Stanley predicts will grow to be the world's third largest in a decade. The brokerage firm also predicts India's e-commerce market will grow more than 1,200% in that time.
While Amazon is racing to build capital-intensive infrastructure in India, Alibaba has focused more on acquisitions, establishing footholds in as many different aspects of e-commerce as possible.
Alibaba got a major leg up in 2015, when it acquired a stake in Paytm, one of India's most recognizable e-commerce platforms. The value of that investment has tripled since then.
It also doesn't hurt that Alibaba has a close relationship with Softbank Corp. (OTCMKTS: SFTBY). Softbank CEO Masayoshi Son was an early investor in Alibaba, taking on a stake that is now worth more than $100 billion.
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Softbank invested $2.5 billion in the popular Indian e-commerce company Flipkart in 2017. Plus, Son recently established Vision Fund, the world's largest private equity fund, which has already invested big money in several young Indian tech companies. So don't be surprised if some of these companies end up in alliance with Alibaba in the coming years as its presence in the Indian e-commerce market increases.
Reason No. 3: More Favorable to Vendors
Alibaba's asset-light business model doesn't just save on costs. It fosters good relationships with its sellers. Alibaba doesn't compete with its client businesses, and in fact puts resources into helping them attract customers.
A 2015 article in Forbes told the story of Yan Ge Ge, who was unsuccessful trying to sell products to young mothers. Alibaba's marketing consultant wing, Alimama, helped her identify a different customer base, and her sales soared as a result.
Since Alibaba profits from the increased traffic when sellers are more successful, everybody wins.
The reason this matters is that Alibaba and Amazon are going to be head to head in more and more territories in the near future. It won't be long, in fact, before Alibaba makes a play in the United States.
As Forbes noted, third-party vendors make up 40% of Amazon's sales. And some vendors are not happy with Amazon's practices - especially when it comes to Amazon's attempts to undercut them.
What's going to happen to those third-party sales when a more vendor-friendly platform comes in?
As Alibaba and Amazon go head to head, the Chinese company's ability to play well with others without hindering its own operations is going to have serious consequences for Amazon's ability to compete.
Reason No. 4: Strong Acquisitions
Alibaba's acquisition of Paytm in India has proven to be a major success. Other acquisitions include the Chinese spin-off of Yum! Brands Inc. (NYSE: YUM), as well as ChinaVision Media - now Alibaba Pictures Group Ltd. - China's biggest entertainment company
As Alibaba makes a push into the United States and other territories, you can expect a merger that will catch Wall Street by surprise.
Keith thinks that acquisition will be Target Corp. (NYSE: TGT).
Target already sells products on Tmall, and in 2016, Alibaba lured HR officer Jodee Kozlak from Target to lead its global expansion.
Target's consumer base and strong presence in the United States make it a prime acquisition target for Alibaba, and Target will likely see it as an attractive move to give it a competitive edge against Amazon.
Keith sees the deal happening in the next year or two. And that means big profits for Alibaba and for you - if you're out in front of it.
Reason No. 5: Continued Innovation
As we said earlier, Alibaba began as an innovator, not a copycat. Its trailblazing entry into the business-to-business e-commerce space set a standard the company continues to follow.
Alipay, administered by Alibaba subsidiary Ant Financial, is the biggest mobile payment platform in the world after surpassing PayPal in 2013.
Unlike competitors Apple Pay and Amazon Payments, Alipay is not tethered to credit cards. That means it has the potential replace the credit card payment system altogether, while also tethering customers to the Alibaba brand.
Alipay is not just for e-commerce purchases, either. It is accepted at brick-and-mortar retailers across China and now even at Lacoste locations in North America - with more sure to follow.
In KFC restaurants in China, customers can pay simply by smiling. A 3D camera uses facial recognition to identify the account and complete the transaction.
Alibaba unveiled another innovation at the end of 2017, when it launched giant vending machines stocked with cars in Nanjing and Shanghai.
Because of the size of the products and the need for test-driving, the auto industry doesn't lend itself well to e-commerce. But Alibaba's vending machine eliminates the haggling that so many people hate and puts the customer in control of the experience.
Taobao customers in good standing and with a strong credit rating use the portal to pick the car they want. They can then test drive it for three days. If they choose to keep it, they don't even have to go back to the vending machine.
Alibaba plans to install dozens of these machines over the next year and make the car-buying process as easy as buying a bag of chips.
Innovations like these make it clear that this company is much more than the "Amazon of China." It is an e-commerce powerhouse that can easily serve as a foundational stock for your portfolio.
As Bill Patalon puts it, Alibaba is a "single-stock wealth machine."
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About the Author
Stephen Mack has been writing about economics and finance since 2011. He contributed material for the best-selling books Aftershock and The Aftershock Investor. He lives in Baltimore, Maryland.