Alibaba Flexes Its Growth Muscle In The Quarterly Results

by Trefis Team
Alibaba Group
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Riding on the wave of strong growth in the Chinese e-commerce market, Alibaba (NYSE:BABA) posted a stellar 54% rise in revenue during the quarter ending September. Rising monetization on the mobile platform, coupled with 52% year-over-year increase in the annual active buyer base, fueled this solid performance. These results have taken Alibaba’s stock higher, and it now trades at around 55% premium to its IPO price of $68.

However, the profitability came down during the quarter owing to the acquisition of new businesses, investments in mobile, cloud computing and other growth initiatives, as well as rise in marketing expenses. The non-GAAP EBITDA margin decreased by 890 basis points year-over-year to 50.5%. Share-based compensation as a percentage of revenue increased to 17.9% as compared to 7.9% in the same period a year ago. We expect these huge investments in growth strategies to weigh on the company’s margin in the coming quarters as well.

Alibaba has tremendous potential to expand its business not only within China, but also in international markets. We expect the company’s active buyer base in China to double in the coming years. The company could also flex its cash muscle to expand rapidly in the markets of North America, South America and Russia. Hence, we forecast the company’s top-line to grow rapidly in the next few years.

We are in the process of revising our $80 price estimate for Alibaba’s stock.

See our complete analysis for Alibaba

Immense Growth Potential In Chinese Retail Marketplaces

Alibaba’s China’s retail marketplace business model, which comprises around 90% of our valuation, witnessed significant growth during the quarter. Overall gross merchandise value (GMV) on Chinese retail marketplaces rose by 48.7%, on the back of increases of 38.2% and 77.8% in Taobao’s and Tmall’s  GMV, respectively. Revenue from these marketplaces surged by 47.7% to $2.1 billion, comprising for around 76% of the total revenue.

We believe metrics pertaining to number of average active buyers and average annual spending per active buyer on Chinese marketplaces are still low and have significant room for expansion in the long-run. We expect the former metric to rise from 307 million in September 2014 to 527 million by the end of 2020. Moreover, we forecast the average annual spending per active buyer to expand from $1,271 in 2013 to $2,096 by the end of forecast horizon. Several factors support the strong growth we forecast, including increased Internet penetration, the growing percentage of Internet users shopping online, increased per-capita consumption, and additional  product categories sold online. All these factors are seeing rapid growth in China.

Rising Mobile Commerce Is Fueling Growth

Alibaba continued its impressive performance on the mobile platform .  Mobile GMV accounted for 35.8% of the total transactions on Chinese retail marketplaces, as compared to 32.8% in the previous quarter and 14.7% in the same period a year ago. Significantly, mobile revenue rose by 1020% to $606 million during the period. Correspondingly, mobile monthly active users rose by 138.5% year over year and 15.4% quarter over quarter to 217 million in September 2014.

We believe Alibaba will continue to show a healthy increase in mobile monetization in the coming quarters as well, since more than 80% of Internet users in China access web through mobile devices. This will assuage some of the investor concerns related to rising competition from Tencent, which is making an e-commerce play on its widely-popular WeChat platform. We will continue to track mobile metrics in the coming quarters, to closely examine how competition could impact transactions volume and margins on the mobile platform in the future.

International Expansion Represents Long-Term Opportunity

International expansion also adds upside for Alibaba in the long-run. Though international region currently accounts for only around 10% of the overall business, we think this figure will rise in the future. Alibaba has a huge cash muscle, which it could utilize to expand in the U.S., Brazil, Russia, etc., by localizing its websites, improving quality standards and delivery efficiency. While the international wholesale commerce business rose by 24%, the growth was much higher at 100% in the international retail business (AliExpress) during the recent quarter. We expect the revenue from AliExpress business to increase by a CAGR of more than 30% over our forecast period due to uptick in demand for Chinese products in international markets. We encourage our readers to use our model to tweak estimates for Alibaba’s international revenue to see its impact on valuation.

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