What If Alibaba’s Consumer Coverage Falls To 60% In China?

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Almost 75% of Alibaba‘s (NYSE:BABA) valuation can be attributed to its operations in China. Needless to say, its share within the country’s e-commerce market matters. In 2014, buyers on Alibaba’s China marketplaces accounted for nearly 85% of total estimated online shoppers in region. This clearly establishes Alibaba’s dominance in the country and we expect the figure to increase further in 2015. However, over the next several years, we expect Alibaba’s average active buyers as a percentage of total online shoppers in China to decline slightly due to growing competition. So what happens if the competition intensifies and this figure drops sharply to 60%? The valuation drops by 15%! To help our readers assess the impact, we have created a mini interactive model where they can modify Alibaba’s buyer coverage (average active buyers as % of total online shoppers) to see the change in Average Active Buyer forecast (select grid view on top right corner for concise view of all drivers and output). Readers can then leverage this generated change and apply it our valuation model for Alibaba to see the how it affects the price estimate. Our $82 price estimate for Alibaba’s stock, represents a more than 20% premium to the current market price.

See our mini interactive model for Average Active Buyers forecast here

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See our complete analysis for Alibaba

What Could Happen If Alibaba’s Buyer Coverage In China Falls To 60%? 

Considering the growth in China’s e-commerce market, online consumption and Alibaba’s dominance, there is a good chance that the competition will intensify. We have incorporated this in our expectations and our base forecast for Alibaba’s average active buyers in China marketplaces incorporates a decrease  in Alibaba’s average active buyers as percentage of total online buyers in China from 88% in 2015 to nearly 81.5% in 2021. This is still a relatively high figure and we remain bullish on Alibaba’s ability to ward off competition. Nevertheless, changing market dynamics and JD.com’s expansion pose risks to our current estimates. So what if growing competition pushes down Alibaba’s buyer coverage to as low as 60%? This figure below demonstrates the change, as follows:

Baba AAB

 

1) the 60% figure stipulates that Alibaba’s average active buyers will reach only 466 million by 2021, as opposed to our current forecast of 621 million. This represents 25% decline in the number of buyers.

2) Additionally, this scenario requires the compound annual growth rate (CAGR) for Alibaba’s average active buyers in China for the period of 2014 to 2021 to drop from base-case rate of 11.66% to 7.18%, representing nearly 450 basis point decrease

3) As the number of average active buyers in China is a critical driver for Alibaba’s valuation, our valuation model (can be accessed here) predicts that the above mentioned decline could imply more than 15% downside to our current price estimate.

What Could Trigger Such A Decline? 

Changing market dynamics certainly pose a threat, assuming JD.com can fully take advantage of it. In 2013, C2C (consumer to consumer) sales constituted nearly 60% of the market but the figure is expected to go down due to strong growth in B2C (business to consumer) segment. [1] Alibaba is relatively stronger in C2C market, which means its competitors can take advantage of the growth in B2C segment and Alibaba can lose share faster than we expect. JD.com, which was traditionally a direct sales retailer, has also expanded into a marketplace model, thus competing on Alibaba’s turf.

Although Baidu is not directly involved in e-commerce, it appears that the company could expand in this arena. It continues to make a strong push in online-to-offline services, which essentially means enabling purchase of offline goods via an online platform. Additionally, it has developed a device similar to Google glass which can identify certain goods and let the user navigate online to buy them. Besides this, the joint venture between Dalian Wanda group, Baidu and TenCent holdings launched e-commerce site Ffan.com in mid 2015. This could connect Dalian Wanda group’s offline retail business with an online platform and pose more problems for Alibaba.

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Notes:
  1. China Online Shopping Total Transactions Reached $101B in Q2 2014, Exceeding 10% of Total Retail, July 28, 2014, China Internet Watch []