Here’s How The “Social” Aspect Is Helping Alibaba’s E Commerce App

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While Facebook might be the undisputed leader in social media, Alibaba (NYSE:BABA) is adding several social features to its marketplace mobile app “Taobao” to keep users hooked. In its Q1 2017 results call, Alibaba’s Chief Executive Daniel Zhang stated that social features are extending the visiting frequency of users, to the extent that Taobao is more like a social commerce app rather than a market place.  As per our estimates, average active buyers and average spend per active buyer are two key metrics which drive the valuation of Alibaba’s most valuable  segment, in our estimation, the China Retail Online Marketing segment. Taobao’s social features are attracting more users to the app and increasing their engagement, which is leading  to higher user spend on the app. This strategy will drive revenues for Alibaba over the longer term, allowing the company to retain its competitive advantage.

See our complete analysis for Alibaba

Social Shopping Enticing Younger Customers To Spend More

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According to a recent Bloomberg Report, Alibaba’s efforts to create social features on its e-commerce app are paying off. The company encourages users to join special interest groups, based on their buying patterns as analysed by the company through millions of data points. Within these groups, users can be part of discussions. Users can share product information and recommendations with each other. They can also participate in live streams with each other or test and share  tips. Experts believe that these features are exciting for younger consumers who want to create a social experience around their shopping and lead to higher number of visits and more time spent on the app every day.  According to Alibaba, users launch the Taobao app an average of seven times every day. This is a big number for any app.  The company has been able to provide Chinese shoppers their preferred offline social buying experience in an online market place and this keeps them engaged and makes them return to Alibaba’s e commerce app multiple times every day.

According to our estimates, average spend per active buyer on Alibaba’s China retail platform will increase from around $1,200 in 2016 to more than $1,500 by the end of our forecast period.

Several factors are likely to support this increase spend per buyer, such as:  1) growth in Chinese e-commerce; 2) an increase in product categories offered by Alibaba; 3) advancement in online payment systems;  and, 4) further growth in value-based services offered by Alibaba. The social shopping aspect is another factor which can keep young users hooked to Alibaba’s platform and lure them into spending more money on shopping, impacting this metric positively. As young users look at products recommended by their peers and receive reviews from special interest groups, they can be attracted to increase their spending on Alibaba’s platform. If there is an increase in the average spend per active buyer on Alibaba’s platform and this number reaches around $1,800 by the end of our forecast period, there can be a nearly 10% upside to our price estimate.

Alibaba has a dominant share in China’s e-commerce market.  However, competitors such as JD.com are investing heavily in warehouses and faster delivery mechanisms to actively compete with it. We believe Alibaba’s focus on adding social features to its e-commerce app gives it another competitive edge and can prove to be an important driver to keep users engaged in shopping on its platform and drive revenue growth over the long term.

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