Here Are The Key Drivers And Barriers For Alibaba

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Alibaba (NYSE:BABA) has attracted significant investor attention since its successful IPO last year. The company’s revenue rose from 34,517 RMB million in FY 2013 to 76,204 RMB million in FY 2015. At the same time, its EBITDA margin increased from 48% to 53%. Recently, the company’s stock rose by over 10% on better-than-expected growth in the first quarter of 2015. In this article, we analyze the key drivers and barriers for Alibaba in order to understand where it could gain or lose, going forward.

We believe the rapid growth of the Chinese e-commerce market is the most important growth driver for Alibaba. With its size set to surpass $1 trillion in the coming years, Alibaba’s leading position in this market will fuel the company’s revenue growth in the future. Additionally, international expansion and investments in other Internet companies could also add significantly to the company’s revenue stream over the long run. However, investors must watch out for certain barriers such as the low monetization rate on mobile devices and the sale of counterfeit products, as these factors could weigh on Alibaba’s stock in the short term. Additionally, we believe Alibaba’s market share could come down somewhat in the future owing to the growing popularity of B2C (business-to-consumer) segment in the Chinese e-commerce market.

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See our complete analysis for Alibaba

Key Drivers

Explosive Growth In The Chinese E-Commerce Market : The Chinese e-commerce market is forecast to witness stellar growth in the coming years.  The market could expand from $426.26 billion in 2014 to over $1 trillion by 2018, according to eMarketer, a market research firm. [1] Moreover, by 2018, the Chinese e-commerce market is estimated to become bigger than the combined e-commerce markets of the U.S., Britain, Japan, Germany, and France.

Rising Internet penetration and the growing popularity of online shopping are the main drivers for the surge in demand. While the Internet penetration rate and the number of Internet users shopping online in China were seen at 47.9% and around 360 million, respectively, at the end of last year, we believe these metrics could rise to over-65% and 700 million over the long run. [2]. Since Alibaba is positioned as the leading player in the Chinese e-commerce market, with around 80% market share, we expect it to heavily leverage the growing demand within this market.

International Expansion: The global e-commerce retail market is poised to rise from $1,316 billion in 2014 at a CAGR of over 17% to $2,489 billion in 2018, according to estimates by eMarketer. [1]. We expect Alibaba to accelerate its push into the global e-commerce market in the coming years, on its strong brand image and solid cash reserves. Alibaba is already positioned as a strong e-commerce player in Brazil and Russia, where its market shares are rising. Within the U.S., Alibaba is present in the form of AliExpress.  Additionally, with recent investments in the U.S. retailer Zulily, as well as ShopRunner and Jet.com (which are being touted as competitors to Amazon), Alibaba is flexing its muscles in the second largest e-commerce market of the world, the U.S. On account of these steps, we expect Alibaba’s international revenues to rise sharply over our forecast horizon.

Other Opportunities In The Internet Sector: Besides the e-commerce market, Alibaba is also aggressively investing in other Internet companies, and this could diversify its revenue stream in the coming years. Alibaba’s investments in companies including SnapChat (a popular social network), Lyft (a ride sharing service), Tango (a messaging service), Peel (TV remote app developer) and Kabam (mobile gaming developer) could potentially reap huge profits for the company in the coming years. We believe Alibaba will continue to make such aggressive investments in the future as well to bolster its long-term outlook.

Key Barriers:

Low Monetization Rate On Mobile: The Chinese e-commerce market is witnessing rapid growth in mobile user base. As a result, the share of mobile platform in Alibaba’s gross merchandise volume (GMV) has risen drastically from 27.4% in Q1 2014 to 50.6% in Q1 2015. This is somewhat detrimental to Alibaba’s revenue growth in the short term considering the mobile platform has a lower monetization rate (1.96%) in comparison to the desktop monetization rate (around 3.2%), owing to its smaller screen size. Over the long run, we expect mobile monetization rates to increase to desktop levels with improvement in the quality and targetability of mobile ads.

Problem Of Counterfeit Products: Another issue that is plaguing Alibaba’s Chinese marketplaces is the massive presence of counterfeit products. Earlier this year, the company had come under criticism from China’s regulatory authority SAIC (State Administration for Industry and Commerce) for not doing enough to curtail illegal activities on its Taobao marketplace. More recently, the American Apparel & Footwear Association (AAFA) expressed concerns pertaining to the sale of counterfeit products on Alibaba’s C2C marketplace. In May 2015, the luxury group Kering (which owns leading brands such as Gucci and Saint Laurent) filed a lawsuit against Alibaba on charges of trademark infringement, counterfeiting, and more. [3] With no end in sight for these controversies, we believe this could partly dilute Alibaba’s brand image in the Chinese and international markets. Moreover, the strengthening of efforts to remove controversial listings could impact transactional growth on Taobao in the near term, owing to closure of a large number of seller accounts.

Trends Towards B2C In The Chinese Ecommerce Market: The China’s e-commerce market can be broken down into two segments — consumer-to-consumer and (C2C) and business-to-consumer (B2C) models. Though the C2C segment comprised around 60% of the Chinese online shopping market in 2013, the share could drop to 40% by 2017, according to iResearch. At the same time, the share of B2C model in the overall market could rise to 60% by 2017. [4]. This creates a difficult situation for Alibaba as its market share is much lower in the B2C segment. Though Alibaba’s Taobao accounts for 95% market share in the C2C market, its Tmall comprises just 58% market share of the B2C segment (as of Q3 2014), according to iResearch. [5]. As a result of these trends, we expect Alibaba’s overall market share to slip from around 80% in 2014 to 73% by 2017.

Our $97.11 price estimate for Alibaba’s stock, represents near-10% premium to the current market price.

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Notes:
  1. Retail Sales Worldwide Will Top $22 Trillion This Year, eMarketer, December 23, 2014 [] []
  2. China Internet: 649 Million Users, 86% On Mobile; Advertising Trends, Barron’s Asia, February 3, 2015 []
  3. Luxury Group Kering Suing Alibaba (BABA) Over Counterfeit Claims – Stocks in the News, Nasdaq, May 20, 2015 []
  4. China Online Shopping GMV Soars 47.1%, iResearch, August 11, 2014 []
  5. Strong Growth in China Online Shopping Market in Q3 2014, China Internet Watch, December 10, 2014 []