Best Stock to Buy Right Now: Alibaba vs. Amazon

Alibaba Group (NYSE: BABA) is often considered the "Amazon (NASDAQ: AMZN) of China." It's the largest e-commerce and cloud infrastructure company in that country, but Amazon is still the world's top e-commerce and cloud infrastructure player.

When Alibaba went public in 2014, many investors were impressed by its rapid growth and its dominance of its two core markets. But over the past 10 years, its stock rose less than 120% as Amazon's shares surged nearly 650%. Let's see why Alibaba underperformed its bigger American counterpart -- and if it might catch up over the next few years.

Image source: Getty Images.

What challenges does Alibaba face?

Alibaba might seem similar to Amazon, but it operates a different business model. It still generates most of its profits from its Chinese e-commerce marketplaces. Its cloud business operates at much lower margins, while its other smaller businesses are mostly unprofitable.

But the company's two main Chinese marketplaces, Taobao and Tmall, are growing more slowly than its other lower-margin businesses. That slowdown was caused by competition, macro headwinds in China, and an antitrust crackdown on the business that barred it from locking in its merchants with exclusive deals or using aggressive loss-leading promotions. That crackdown, which occurred in 2021, caused its stock to underperform many of its industry peers over the following four years.

To offset that pressure, Alibaba has been expanding its higher-growth overseas marketplaces (including Lazada in Southeast Asia, Trendyol in Turkey, Daraz in South Asia, and AliExpress for cross-border purchases) and its Cainiao logistics business. However, it's gradually compressing its margins as it expands those unprofitable businesses.

On the bright side, its profitable cloud business is gradually expanding again as it locks in more businesses with its Qwen large language models (LLMs) for generative artificial intelligence (AI). That expansion could offset some of the near-term pressure on its gross and operating margins.

To stabilize its business, Alibaba must strengthen Taobao and Tmall, narrow the losses across its overseas marketplaces, lock in more cloud customers as the AI market expands, and streamline its business by spinning off its noncore businesses.

Assuming it checks all those boxes, analysts expect Alibaba's revenue and EPS to appreciate at a compound annual growth rate (CAGR) of 8% and 12%, respectively, from fiscal 2025 (which ended this March) to fiscal 2028. Its high-growth days might be over, but it still looks reasonably valued at 21 times next year's earnings. Its valuations have been compressed by the persistent trade war between the U.S. and China, but a favorable trade deal could drive the bulls back to its underappreciated stock.

What challenges does Amazon face?

Unlike Alibaba, Amazon generates most of its profits from its higher-margin cloud infrastructure business, which supports the growth of its lower-margin e-commerce and retail businesses. So as long as its Amazon Web Services (AWS) cloud platform keeps growing, it can afford to keep expanding its retail business with free deliveries, steep discounts, and loss-leading perks for its Prime members.

The expansion of Prime, which serves over 240 million subscribers worldwide, further widens its moat against other offline and online retailers. Amazon has also been expanding its high-margin advertising business, which serves up promoted listings and ads across its online marketplaces, as a secondary profit engine alongside AWS.

Its e-commerce business still faces plenty of competition from superstores like Walmart and aggressive Chinese challengers like PDD Holdings' Temu. But Amazon is offsetting that pressure by expanding its own third-party marketplace, automating its logistics networks, and deploying more AI tools to strengthen its customer recommendations.

As for AWS, it should continue to grow as the secular expansion of the AI market drives more companies to ramp up their spending on its cloud infrastructure services. To capitalize on the boom, it's weaving more AI features into AWS, developing its own custom AI chips, and working with the AI start-up Anthropic to build new generative AI applications. However, AWS' closest cloud competitor -- Microsoft Azure -- remains a formidable rival in the generative AI market.

From 2024 to 2027, analysts expect Amazon's revenue and EPS to achieve a CAGR of 11% and 19%, respectively. Those growth rates are still impressive, but it already trades at 30 times next year's earnings, so a lot of AI hype might already be baked into its current valuations.

The better buy: Alibaba

I've owned Amazon for a long time, and I don't plan to sell my shares anytime soon. That said, Alibaba looks like the more compelling investment at its current valuations. The market might be underestimating its ability to beat analysts' conservative estimates while overestimating Amazon's ability to surpass its rosier forecasts.

Leo Sun has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Microsoft, and Walmart. The Motley Fool recommends Alibaba Group and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.