These Factors Can Cause Significant Movement In Alibaba’s Stock Price

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Alibaba Group

Alibaba (NYSE:BABA) is the leading e-commerce player in China and recorded gross merchandise volume (GMV) of more than $350 billion last year. Though the company’s stock price shot up post the IPO last year, it has fallen by about 20% over the last few months, due to weaker-than-expected earnings and concerns related to sale of counterfeit products on Alibaba’s marketplaces. Though our $97.11 price estimate for Alibaba’s stock represents near-15% premium to the market, we think there are certain triggers and plausible developments that can swing the stock substantially over the next few years, assuming the market prices in these triggers correctly. Specifically, we think the possibility of increased competition in China’s rapidly growing e-commerce market, and faster-than-expected increase in international revenues, are two key plausible events that can trigger stock price changes for better or worse.

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Loss In China Market Share Due To Changing Market Structure (-10%): China’s online commerce market can be broken down into two segments – consumer-to-consumer (C2C ) and business-to-consumer (B2C) models. While the  C2C segment accounted for around 60% of the overall Chinese online shopping market in 2013, its share could decline to 40% by 2017, according to iResearch. At the same time, the share of B2C model in the overall market could increase to 60% by 2017. This leads to a troubling situation for Alibaba, considering its market share is much lower in the B2C segment. As compared to 95% market share controlled by Alibaba’s Taobao in the C2C market, Alibaba’s Tmall accounts for around 57.6% share in the B2C segment (as of Q3 2014), according to iResearch. [1]. A possible reason to Alibaba’s lower market share in B2C segment could be its late entry into the market — while Taobao was created in 2003, Tmall was launched later in 2008.

This implies that Alibaba will have to increase its market share in the rapidly emerging B2C segment to retain its dominant (around 80%) share in the overall Chinese e-commerce market. With our $97 per share price estimate, we believe Alibaba will find it difficult to enhance its present market share in the B2C market due to intense competition in this segment (with the presence of a large number of players having substantial resources). As a result, we have factored in Alibaba’s overall market share in China to decrease to about 73% by 2017.

Under a scenario wherein Alibaba’s market share further slips in the B2C segment, its overall market share could decline to around 65% by 2017, resulting in around 10% fall in the company’s value. There are certain factors that could make this scenario plausible including:  1) loss in brand recognition if reports related to the sale of counterfeit products on the company’s marketplaces lead to reduced traction among buyers; and,  2) increased competition from players such as JD.com, which can leverage its strong partnership with Tencent to expand on the mobile platform. Additionally, JD.com also competes under a direct sales model, wherein it sells its own inventory, allowing it to better track quality of goods’ sold on its platform.

Faster-Than-Expected International Growth (+10%): International expansion could be a key source of growth for the e-commerce behemoth in the coming years. With the global business-to-consumer (B2C) e-commerce market set to expand from $1.251 trillion in 2013 to $2.357 trillion by 2017, according to eMarketer, we expect Alibaba to accelerate its push into international markets. [2]

We forecast Alibaba’s international commerce revenues to cross $4 billion in the long-run, in our valuation model. The key factors that fuel this estimate include:  1) a rapid rise in transaction volumes on the AliExpress platform in markets including Russia, Brazil and the U.S.; and, 2) the expected launch of a global version of Taobao marketplace in the future. However, it’s also probable that Alibaba could branch out more aggressively into foreign markets, leveraging its strong brand recognition and huge cash reserves to command a higher share of the global e-commerce market. In such a scenario, where its international commerce revenue rises to over $9 billion in the long-run, it would lead to around 10% increase in the company’s value, in our view. This revenue estimate seems somewhat achievable considering the e-commerce markets of Brazil and Russia together are expected to be generate more than $50 billion annually at present. [3] [4]

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Notes:
  1. Strong Growth in China Online Shopping Market in Q3 2014, China Internet Watch, December 10, 2014 []
  2. Global B2C Ecommerce Sales to Hit $1.5 Trillion This Year Driven by Growth in Emerging Markets, eMarketer, February 2014 []
  3. Despite Double-Digit Growth, Ecommerce Grabs Small Share of Mexico’s Retail Sales, eMarketer, January 2015 []
  4. Morgan Stanley Predicts E-Commerce Growth In Russia, Rusbase, January 2013 []