Daily Gains Letter

Alibaba: A Threat to Google?

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Alibaba A Threat to GoogleSome say Alibaba Group Holding Limited (NYSE/BABA) is the Google Inc. (NASDAQ/ GOOG) of China. And that is currently the case at this juncture…until Google can gain a foothold in the country’s Internet technology sector. But that will not be easy.

Comparing Alibaba to Google in the technology sector at this time is difficult. If we could fast-forward a few years, the answer to which Internet starlet is a better choice would likely be clearer.

Google is currently nearly twice as big as Alibaba based on market capitalization. This on its own doesn’t mean that Google is superior; however, I will explain why I think it may indeed be the better choice now in the Internet technology sector.

Alibaba is set to report its first quarter on May 7. Unfortunately, the quarter may disappoint. Here’s why: founder and CEO Jack Ma said that the company wouldn’t be adding any new workers this year unless someone leaves. The company has about 34,000 employees and, according to Ma, it is sufficient based on the company’s revenue stream. So, this has investors thinking: does the comment mean that Alibaba is facing the same slowing revenue growth it did in the fourth quarter? At this time, the company hasn’t given any specific warning on this, but it is certainly a possibility.

Comparing the two, I would stick with Google for the time being in the IT sector. Alibaba wants to expand further into the U.S. and other countries. Google, as I said, wants access to China’s IT sector. The outcome is unknown, so you need to base any decision between the two stock-picks on the current metrics.

Google trades at 5.71 X trailing sales, which is far superior to the hefty 18.71 X for Alibaba. Clearly the number suggests that Alibaba is facing revenue issues in the Internet technology sector.

So, while Alibaba is trying to streamline and better manage its Internet assets, Google has since stuck its tentacles into many businesses in an effort to diversify its revenue stream in the IT sector, where it depends solely on advertising.

For example, Google just launched a high-speed Internet fiber service in eight U.S. cities to gauge market interest. The cities? Atlanta, Austin, Charlotte, Kansas City, Nashville, Provo, Raleigh-Durham, and Salt Lake City. Whether the service will catch on in an extremely competitive Internet space is unclear. But the sign-ups from these markets will give us some indication.

Of course, Google also has the self-driving car, home consumer devices, and “YouTube,” as well as a grocery delivery service by solar-powered drones. (Imagine getting a six-pack of beer delivered by a drone? What a great technology to get in on at this point.) Of course, the company’s popular YouTube service continues to reach billions, but Google has yet to figure out how to make it profitable.

Alibaba’s report next week will provide some insight on where things stand. For now, Google is still one of the top plays in the Internet technology sector, along with Facebook, Inc. (NASDAQ/FB) and Netflix, Inc. (NASDAQ/NFLX).

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