Alibaba To Draw Long-Term Gains From PayTM Investment

Online retail giant Alibaba (NYSE:BABA) has successfully established itself as the dominant player in the Chinese e-commerce market through its websites Taobao, Tmall, 1688.com and Aliexpress. More recently, the company acquired a controlling interest in Lazada for $1 billion, valuing the Singaporean e-commerce giant at $1.5 billion. ^[1] In addition to the core e-commerce business, Alibaba has invested significantly in non-commerce businesses such as cloud computing, internet infrastructure, digital media and entertainment. While the online retail and wholesale business continue to grow and generate profits for Alibaba, the company is looking to diversify and look at long-term growth areas. Among these areas of growth, its investment in Indian online payment gateway and e-wallet PayTM could be key for Alibaba in the long run. Below we take a look at the factors driving growth in the space and how Alibaba can gain from this investment.

According to our estimates, the non-commerce businesses make up around 8% of our $88 price estimate for Alibaba’s stock. Our price estimate is slightly lower than the current market price.

See our complete analysis for Alibaba

PayTM As A Lucrative Investment

PayTM is an online payment gateway and e-wallet which was founded in 2010 and has since grown to be one of the largest such companies in India. According to data compiled by the Economic Times, Alibaba and Ant Financial Services Group (formerly Alipay) combined own a 40% stake in PayTM, which is estimated to be worth around $5 billion. ^{[2] [3]} Alibaba has invested a total of around $1.5 billion in PayTM at valuations of $800 million and $3.4 billion in the past. ^[4]

This investment has become even more significant for Alibaba in the wake of the decision by the Indian Government to demonetize 86% of the available currency in circulation in November last year. ^[5] The move was made by the government in an attempt to promote digital payments instead of cash-based transactions to curb the black market and counterfeit currency in circulation. Subsequently, digital transactions including debit card payments, credit card payments, and e-wallet payments surged by 100% in the month following the announcement. ^[6] As a result, PayTM observed a 400% surge in traffic, a 200% increase in the total number of app downloads and 1000% growth in money added to e-wallets. In the 10-day period following the news, PayTM added around 20 million users to its total user base. PayTM now has a user base of around 170 million, which is just shy of PayPal’s (NASDAQ:PYPL) 196 million users.

Since it is still in a relatively nascent stage, PayTM’s monetization per user is much lower than what PayPal makes per user. PayPal’s net revenue for 2015 stood at around $9.2 billion, while PayTM generated around $130 million in revenues for fiscal year ended March 2016. ^[7] In the long run, however, PayTM’s business is likely to pick up significantly given the expected growth in the digital payments market in India. According to a recent report by the Boston Consulting Group, the total market for digital payments in India could grow at a CAGR of almost 60% through 2020 to become a $500 billion market. ^[8]

Losses Likely To Continue In The Near Term

Alibaba reported segment-wise margins for the first time in the earnings report for the June-ended quarter last year. According to Alibaba’s filings, the company’s non-commerce segments combined reported an operating loss while the online retail and wholesale businesses reported profits. ^[9] Alibaba is investing heavily in digital media, cloud computing, online video streaming and other new ventures, banking on long-term growth. With Alibaba’s deep pockets and intent to capture a significant chunk of the growing Asian markets, PayTM could be a key strategic investment for the company.

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1. Alibaba Expands in Southeast Asia With $1 Billion Lazada Deal, Bloomberg, April 2016 [↩]
2. Alibaba, Ant Financial invest about $680 million in Paytm, up stake to 40%, Economic Times, September 2015 [↩]
3. Paytm’s Valuations Rise 4.7% As Demonetisation Lends A Helping Hand, Bloomberg Quint, December 2016 [↩]
4. Modi’s Christmas Gift To Alibaba, Seeking Alpha, December 2016 [↩]
5. India pulled 86% of its cash out of circulation. It’s not going well, Vox, November 2016 [↩]
6. Digital Transactions Up By 100% Since Demonetisation, Says NPCI CEO, The Wire, November 2016 [↩]
7. Paytm Financials: One97’s loss at INR 1,549 Cr in the Fiscal Year 15-16, Hacker Street, December 2016 [↩]
8. Digital Payments 2020: The Making of a $500 Billion Ecosystem in India, Boston Consulting Group Report, July 2016 [↩]
9. Alibaba’s 6-K For Q1’17, SEC, August 2016 [↩]