Can Alibaba Group Holding Ltd (NYSE:BABA) Keep Growing?
Alibaba Group Holding Ltd (NYSE:BABA) reported another solid quarter and fiscal year. Gross merchandise volume (GMV) accelerated 24% in F4Q2016, a show that spending remains strong in China despite economic slowdown in the country. Revenue rose 39% and exceeded the consensus estimate by 5%. Below is a summary of Alibaba’s F4Q2016 and F2016 financial performance.
F4Q2016 earnings summary
Alibaba’s 4Q2016 revenue of $3.75 billion was up 39% YoY. GMV rose 24% to $115 billion and adjusted EPS came in at $0.46.
Fiscal 2016 results
Alibaba reported F2016 GMV of $485 billion, up 27% from F2015. Revenue of $15.7 billion was up 33%, primarily driven by strong Chinese e-commerce retail business.
But the 4Q2016 and F2016 results aside, does it look like Alibaba has more gas left to continue its robust growth in the coming years? This Alibaba analysis article examines the company’s risks and opportunities to try and explain what lies ahead for China’s e-commerce gorilla that is targeting $1 trillion in annual GMV over the next four or so years.
What’s interesting about Alibaba?
- Strong mobile growth
Alibaba Group Holding Ltd (NYSE:BABA) said mobile accounted for 73% of its revenue in F4Q2016. The development confirmed Alibaba’s claim as the most powerful data and mobile company in Asia. Mobile as a percentage of revenue increased from 68% a year ago.
The solid mobile growth supported improvement in take-rate. Alibaba’s overall take-rate increased 0.3% YoY in F4Q2016, primarily driven by a sharp increase in mobile monetization. While desktop take-rate remained flat at 2.63%, mobile take-rate ascended 0.7% to 2.41%. Although mobile take-rate still trails desktop, the growth suggests that Alibaba is on the right path to strengthen mobile monetization.
The improvement in the blended take-rate in F4Q2016 appears to be supported by optimization of marketing budgets by Alibaba’s merchants to try and beat the slower economic conditions. Alibaba’s platform offers merchants a one-stop solution for advertising.
- Leading market share
Alibaba Group Holding Ltd (NYSE:BABA) not only boasts the dominant market share in China, the world’s fastest growing economy, but is also the global e-commerce leader. The company’s F2016 GMV of $485 billion was nearly double that of Amazon.com, Inc. (NASDAQ:AMZN) in 2015. Alibaba’s target is to reach $1 trillion GMV over the next four of years and from the latest earnings report, the company is nearly half way its GMV goal.
But Alibaba’s strength is not in what it already has but what it can achieve in the coming years. You find that Alibaba’s GMV and revenue numbers are growing rapidly. The company posted GMV growth of 27% and revenue growth of 33% in F2016. With that, the company stands to take greater advantage of the rapid expansion of the e-commerce industry both domestically and internationally.
To take advantage of the anticipated growth in e-commerce industry, Alibaba is busy enriching its marketplaces with more sections, simplified interfaces and increased surveillance to weed out fake products. Fighting counterfeit goods is important for Alibaba in winning the trust of consumers and genuine vendors. Alibaba is also busy expanding into rural China to unlock new growth in the underserved markets. In F4Q2016, the company expanded into 14,000 rural villages. The management has identified rural expansion as a long-term growth opportunity as competition intensifies in the wealthy cities and the urban market shrinks.
- Massive growth potential
Domestic potential: In the domestic market, Alibaba Group Holding Ltd (NYSE:BABA) stands to benefit from deeper Internet and mobile penetration in China. That fact that the Internet has only so far covered 50% of the Chinese population means that the growth potential for e-commerce providers such as Alibaba is huge, because as more people become online, Alibaba shows them how they can shop conveniently on its marketplaces and have their shopping delivered right to their doorsteps.
International growth potential: Alibaba already has some form of international footprint, but the global operation remains a tiny fraction of the business at just about 10% of total revenue. There is massive growth opportunity abroad for Alibaba, especially in places like India where online shopping trends are on the rise. To seize the opportunity unfolding in India, Alibaba has taken a stake in key Indian e-commerce-facing businesses such as Snapdeal, a leading online marketplace and PayTM, a leading mobile payment processor.
- Revenue diversification drive
Alibaba Group Holding Ltd (NYSE:BABA) is using the powerful force it has built in e-commerce to accelerate revenue diversification. Given the popularity of the Alibaba brand, the company doesn’t struggle as much as its opponents to market a new product of service it brings to market.
In the process of broadening the revenue mix, Alibaba is investing in digital payment, package delivery, online video, cloud computing and news media among others. In the online payment market, Alibaba is closely tied to Alipay, which was once its closely-held subsidiary but which it had to spinoff to sit well with certain regulatory requirements. These side investments are helping Alibaba to offset adverse impact that might arise in its core e-commerce business and also accelerate overall revenue growth. The investments are also important in enabling Alibaba to break overreliance on e-commerce, which is becoming brutally competitive because of the lower barriers to entry in the industry.
- Cloud computing business
Alibaba Group Holding Ltd (NYSE:BABA) has a cloud business reminiscent of Amazon’s AWS called Aliyun. In F4Q2016, Alibaba reported that Aliyun revenue rose 175% YoY and paid subscribers increased 110% to reach 0.5 million at the end of the quarter. Free users of Aliyun stood at more than 2 million at the end of F4Q2016. Alibaba’s cloud business is close to breakeven.
There is no doubt that many investors have been discounting Aliyun in Alibaba valuation and that is because the business has largely been under the radar. But that is not strange because little was known or even said about Amazon’s AWS until it was recently discovered to be a $10 billion revenue business and the power behind Amazon’s profits.
As with AWS, Aliyun is growing rapidly. But unlike AWS, Aliyun enjoys certain unique advantages. China’s protectionist economic policy favors the adoption of Aliyun in the domestic market. Deeper understanding of the Chinese market also means that Aliyun has a leg up against foreign competitors in selling cloud computing to Chinese SMEs. Further, Alibaba has a large pool of potential customers to target with Aliyun give that it already servers millions of merchants on its various marketplaces.
Public cloud computing services revenue is projected to hit $203.9 billion this year.
What’s of concern about Alibaba?
- Tough competition
Although Alibaba Group Holding Ltd (NYSE:BABA) controls nearly 80% of China’s e-commerce market and the expansion of online shopping could support multiple winners, intense competition threaten to slowdown Alibaba’s growth pace. Additionally, fierce competition could eat into the company’s earnings as it spends more money on marketing efforts to fight back against rivals encroaching on its territories.
The lower barriers to entry in the e-commerce provider market are also helping brew tough competition in the industry.
- International expansion challenges
International expansion is inevitable for Alibaba because as the domestic market becomes saturated there will be a natural need to seek for growth abroad. But international expansion comes with its set of challenges. Because the U.S. is one of the international markets Alibaba is eying, penetrating the U.S. will be tough considering the scale and market share of incumbents such as Amazon and eBay Inc. (NASDAQ:EBAY).
Alibaba will also be subject to fragmented legal environments as it expands to different international jurisdictions, thus heightening litigation risks.
- The gray market disorder
Vendors selling fake goods at discounted rates are sucking the blood of genuine brands and that is a problem that Alibaba Group Holding Ltd (NYSE:BABA) is struggling to arrest. There is no doubt Alibaba is trying its best to rid its platform of counterfeit goods, but the cleanup is tough and it might take time before the company can win the trust of all vendors and shoppers who have been scared by the gray market on its marketplaces.
Alibaba Group Holding Ltd (NYSE:BABA) has all the ingredients to sustain its robust growth. But attaining long-term prosperity will largely depend on how the company tackles many of its near-term challenges.
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