How Much Will China Retail Contribute To Alibaba’s Top-Line Growth By FY’20

Alibaba’s (NYSE:BABA) stock has fallen 15% through the September quarter, which was in part attributable to founder Jack Ma announcing his departure from the company. In terms of core business metrics, the company has continued to report solid revenue growth across segments over the last few years. While much of the recent top line growth was due to certain acquisitions in the last couple of years (Lazada, Youku Tudou, Cainiao logistics, Hema supermarkets and Ele.me food delivery), the company’s largest segment, China Retail, has contributed to maximum revenue growth in absolute terms.

We expect the trend to continue in the coming years, and forecast Alibaba to report 30-35% annual growth in revenues by the end of the decade, with China Retail revenues increasing at around 25% annually in the same period. We forecast net revenues to increase from $40 billion in FY’18 to nearly $72 billion by FY’20, with China Retail revenues increasing from $28 billion to $45.5 billion in the same period. Accordingly, the segment is expected to contribute around 55% of Alibaba’s overall revenue growth in the same period. We have summarized our expectations for Alibaba’s international commerce revenue growth through FY’19 and FY’20 on an interactive dashboard for Alibaba’s China Retail segment. Below we take a look at key revenue drivers for this segment.

Factors Driving Segment Growth

Alibaba categorizes its China Retail commerce revenues into retail commissions, marketing services (or customer management) and New Retail revenue streams. Retail commissions include revenues generated by commissions on all products sold on Alibaba’s domestic retail platforms including Tmall and Taobao. In addition, the company earns fees on membership and value added services such as P4P marketing services, which are categorized as Customer Management. The third key contributor to domestic retail is New Retail, which is a newly added segment and includes Hema grocery stores and hypermarkets that the company acquired for $2.9 billion late last year.

China Retail Marketing, or Customer Management, revenues have surged from $8.1 billion in FY’16 to $18.2 billion in FY’18. The growth was primarily due to the company’s ability to provide relevant content to customers leading to higher spend on services by consumers. Not only has the company reported an increase in the number of brands and merchants using these services, leading to a higher number of clicks attributable to P4P marketing services, Alibaba has also reported a corresponding increase in the cost-per-click paid by merchants. Going forward, we expect this segment to generate over $27 billion in revenues by FY’20.

Similarly, retail commission revenues have also increased from $4 billion in FY’16 to $7.4 billion in FY’18. Commission revenues increased primarily due to a surge in total gross merchandise volume (GMV), while the commission rate has remained largely flat at around 3% of Tmall GMV. Going forward, we expect commission revenues to continue to grow at a similar pace, with the increase in GMV driving much of the growth even as the commission rate shrinks by 20-30 basis points. We forecast revenues to be up to nearly $13 billion by FY’20. On the other hand, New Retail is a newly acquired segment for Alibaba, which includes the Hema chain of grocery supermarkets. These revenues surged from $365 million in FY’17 to over $2.5 billion in FY’18 due to the acquisition. Revenues in this stream before the acquisition mainly came from subscription fees for the Wangpu software suite that helps merchants in upgrading and managing their storefronts. We forecast New Retail revenues to increase to over $5 billion by FY’20.

As a result, we forecast combined China Retail commerce revenues to increase at just over 25% annually from $28.1 billion in FY’18 to $45.5 billion by FY’20. If you disagree with our forecasts, you can modify these figures on our interactive revenue contributor dashboard for Alibaba and come up with your own estimates. You can further use these figures in our valuation dashboard for Alibaba to calculate your fair price estimate for the company’s stock based on new estimates.

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