On July 7, shares of Alibaba soared 3.46% with a market cap exceeding 5 trillion Hong Kong dollars, surpassing Tencent market cap 495.131 billion Hong Kong dollars, returning to China's biggest company by market cap. So far, Alibaba shares are worth HK$49,877,719 million and Tencent shares are worth HK$49,304,365 million, Alibaba still occupies the top spot in Internet market cap.

And a few days ago, on June 29, Tencent overtook Alibaba's HK$4.48 trillion to become the China's biggest company by market cap. Alibaba and Tencent, the two China's leading Internet companies, are engaged in a tight race for becoming China's biggest company by market cap, while the other Internet giants are are still far behind.

In the Internet industry, the performance of Alibaba and Tencent has been compared repeatedly, but why is the battle for the top spot in China's stock market cap still going on? The battle between Alibaba and Tencent for the top spot in China's stock market cap is likely to continue, as both giants are focusing on the B-side market. And who will be the first to enter the trillion-dollar market cap in the future, Alibaba or Tencent?

Alibaba and Tencent take turns to top market cap

For listed companies, market cap is a bellwether for capital and company analysis, and changes in stock prices are a very objective indicator of investors' interest in the company. In the Internet industry, the share prices of Alibaba and Tencent are of great reference value, as the two giants' share prices represent the highest level of the Internet industry in China.

Since the beginning of this year, Tencent's share has risen sharply, with a nearly 30% increase during the year. If calculated from March, its  share price rose from less than HK$330 to HK$516 today, an increase of 56%. Alibaba's share price performance this year is relatively calm, with shares up less than 5%. Given that some major stock indexes are still negative this year, this is still a solid performance, but this increase is definitely not the result that the giants hoped for at the beginning of the year.

The difference between Alibaba and Tencent's share price gains may still be influenced by last quarter's earnings results. In the first quarter of the pandemic, Alibaba and Tencent's financial results report performance show some differences.

In the first quarter, Alibaba's revenue reached 114.3 billion yuan, up 22% year-on-year, exceeding market expectations of 107.038 billion yuan. Its non-GAAP net income was 22.3 billion yuan, up 11% year-over-year. Although both maintained some year-over-year growth, this performance is still down quite a bit compared to previous quarters.

According to the financial report, Tencent's operating income last quarter was 108 billion yuan, up 26% year-on-year; and net profit was 27.079 billion yuan, a year-over-year increase of 29%, both exceeded market expectations.

Obviously, Tencent outperformed Alibaba in both revenue and net profit from last quarter's results, which showed that Alibaba's core business, e-commerce, was hit harder by the epidemic in the first quarter. And during the epidemic, users spent more time at home, which drove the performance of Tencent's online game business.

However, fortunately, the epidemic situation in China has improved, Alibaba's e-commerce business has also rapidly recovered. The 618 Shopping Festival is also expected to be driving Alibaba's e-commerce business performance. The recent share price performance of both companies show that their trends are quite positive, and many analysts are also bullish on the two companies, which is also why Alibaba and Tencent are taking turns to top the China's stock market capitalization.

In the e-commerce and social sectors, Alibaba and Tencent each have a dominant market share, which is a key reason for their solid share price performance. Reviewing the performance of Alibaba and Tencent's market capitalization over the past few years, the two sides rarely open up a gap in market capitalization for a long time, and they will continue to play each other in the future.

Despite being in the top of Chinese Internet industry, there are some hidden dangers behind their high market cap.

Alibaba and Tencent are both suffering from anxiety as the competition burns

In the Internet industry, despite frequent comparisons between Alibaba and Tencent, the two companies seldom have a head-to-head competition. Alibaba and Tencent are in a track where one is e-commerce and the other is social. The ecological layout of the giants is such that it is actually competing asymmetrically in many areas.

It can be said that except their core businesses, the competition between Alibaba and Tencent is increasingly fierce.

Alibaba's core businesses include: retail commerce in China, cross-border and global retail commerce, wholesale commerce in China, cross-border and global wholesale business, logistics services, life services, Tmall, Taobao, Cainiao, Ele.me, Fliggy, etc. The three major segments include: cloud computing, digital media and entertainment, and innovation business.

Tencent's core businesses include: online/mobile gaming, community value-added services and applications, online advertising. And other segments mainly include payments and other related services, cloud services and other services. The three main segments include: cloud services, online games, and social and other advertising services.

Comparing Alibaba's and Tencent's businesses, they are in head-to-head competition in cloud computing and entertainment business. In the past two years, both Alibaba and Tencent have focused on the B-side market, according to the financial results disclosed by the two companies in the last quarter. Both have released some data on their B-side business, and Alibaba is far ahead of Tencent.

Businesses such as financial technology and cloud services, which account for 25% of Tencent's total revenue, grew at a slower rate of just 22% year-on-year, compared with 44% in the same period in 2019. In addition, Tencent did not disclose separate revenue figures for its cloud services business last quarter. On March 8, Tencent disclosed its 2019 annual report, which showed that Tencent Cloud's 2019 annual revenue exceeded 17 billion yuan, a growth rate of 87%, accounting for about 17% of the total revenue of the financial technology and enterprise services business.

In the last quarter, Alibaba Cloud's revenue reached 12.2 billion yuan, up 58% year-over-year and up sharply from the previous quarter, and surpassed the 10 billion yuan mark in a single quarter for the second consecutive quarter. On March 20, UK-based research firm Canalys released its report on China's public cloud services market for the fourth quarter of 2019. According to the report, Alibaba Cloud ranked first, with its market share rising to 46.4% from the previous year. During the same period, Tencent Cloud had a market share of 18% and Baidu Cloud had a share of 8.8%. Alibaba Cloud also ranked first in the Asia-Pacific region.

Although Alibaba is ahead of Tencent in the cloud computing, JD.com, Pinduoduo and Meituan are all direct competitors of Alibaba in the e-commerce and food delivery sectors. Take Pinduoduo for example, its current volume is far behind of Taobao and JD.com, but its annual turnover exceeded 1 trillion yuan, the number of users is to reach 630 million, far surpassing JD.com.

Pinduoduo's sinking market is expanding within the 5th ring road, JD.com's logistics highlights its advantages during the epidemic, Meituan's local life service accounts for half of the market share. Ele.me used to be equal with Meituan, however 2 years after being acquired by Alibaba, Meituan is now far ahead of Ele.me. All three companies are involved in Alibaba's core business.

While Alibaba and Tencent's core businesses have avoided head-to-head competition, the competition between the two companies is not weaken and even intensifies in other areas of business. In addition to the competition the two giants have to deal with, the rise of other outside forces is causing them more anxiety, and the competitive pressure from that anxiety may also be affecting both companies' share price performance.

The threats that Alibaba has to deal with
In the e-commerce field, the key that Alibaba can be in a dominant position lies in he has grasped the merchant and e-commerce infrastructure of B-side market, which has erected a high enough moat in both areas. However, with infrastructure like logistics having become widespread across the country, Alibaba does not have enough of a leg up in this area. For Alibaba, in order to always consolidate the e-commerce advantage, the importance of traffic is self-evident. In recent years, Alibaba's main new retail strategy has also been trying to tap into offline traffic growth. Therefore, the core of competition has changed from the back-end traffic realization, into the acquisition of traffic itself.

In terms of user traffic access, Alibaba has always lacked the C-side gene, which has failed to launch its own platforms for traffic like social, search and short video. As a result, it can only rely on external acquisitions or investments to generate traffic, which is the purpose of its stakes in Weibo and Xiaohongshu. Now with the rise of short video, Kuaishou and Douyin also covet the e-commerce live-streaming dividend, which is also a big threat to Alibaba.

Tencent's anxiety about the rise of ByteDance

At the competitive level, Tencent's current anxiety may be from ByteDance. With ByteDance's rapid rise, Tencent can't stop its development. At present, ByteDance already has some hot-selling products like Toutiao, Douyin, Xigua Video. In China, the number of Douyin's daily active users has exceeded 400 million, taking up more and more young users' time.

In particular, ByteDance has already topped short video market, and puts its eyes on the global market. On July 1, according to the latest global app list released by the Sensor Tower platform, for the first half of the year, Douyin and its overseas version, TikTok, ranked first in the world with 626 million downloads. During the same period, it generated $421 million in revenue within the Apple and Google systems, ranking third worldwide.

In March last year, the company in charge of the game business under ByteDance reached an agreement with Sanqi Interactive Entertainment Network Technology Group. It acquired 100% of the latter's subsidiary Shanghai Moky kun Tech. Co.,Ltd., which was seen as an important step for ByteDance's layouy in the game sector. Based on these facts, there are still a number of challenges for Tencent to face ByteDance's rapid rise.

Based on the development of Alibaba and Tencent, although their respective fundamentals are still stable enough to give investors with considerable room for growth, the problems they face are also stumbling blocks that affect them. To widen the gap with each other in the future, Alibaba and Tencent urgently need to open up new growth points, however, whether cloud computing can bear the heavy responsibility?

Who will be the first to enter the trillion-dollar market cap in the future, Alibaba or Tencent?

For Alibaba and Tencent, their current ambitions may not just be limited to the domestic market, but in the future it is crucial for their market capitalization to break through a larger threshold. Up to now, there are only four companies that the stock market capitalization of broken trillion dollars: Apple, Amazon, Microsoft and Alphabet. Of the four companies, Amazon's main business is e-commerce; Microsoft relies heavily on the provision of systems software and software services to reap profits; Alphabet focuses on Internet business, while Apple's main revenue comes from hardware.

Cloud computing has not only become an important part of Amazon's and Microsoft's revenue, but also an important reason for investors to hold on to them, which has also helped Amazon and Microsoft's market capitalization break through the trillion-dollar barrier. As of now, Amazon's market capitalization is $1.52 trillion and Microsoft's is $1.60 trillion. For Tencent and Alibaba, there is actually a possibility that their market capitalization will exceed a trillion dollars.

According to Gartner, the global cloud computing market has reached $64 billion in 2018 and is expected to increase to $246.1 billion by the end of 2020, with a compound annual growth rate of 18% between 2019-2023. As an important part of the new infrastructure, cloud computing has attracted much attention and become one of the key tracks for giants to seize the second half of the Internet from To C to To B. Alibaba and Tencent are no exception.

Based on their market capitalization performance, Alibaba and Tencent still have a chance to break through the trillion-dollar market cap barrier. But for their market capitalization to exceed a trillion dollars in the future, it is urgent for Alibaba and Tencent to find a second growth curve as soon as possible. At present, according to the performance of both Alibaba and Tencent, cloud computing is pinned on high expectations. The only question is who will be able to make a bigger breakthrough in the cloud computing business and seize the high ground in the B-side market, which may be the biggest driver of its stock price.

This is an article from WeChat official accounts MeiGuyanjiushe (ID: meigushe), translated by Chris Yuan.