Alibaba: making you a Babillionaire

Here it is, my write up about the company a lot of you will now, but few of you will be really able to explain into detail what this company does. I’m here to give you a solid summary of all activities of Alibaba and how they will turn people into billionaires. Before we start you should know that I have a long position in Alibaba since the beginning of August 2018.

 

So Alibaba, it’s a Chinese name that a lot of us have heard about but most of us have no clue in what segments this company is active. If you’ve heard about them you could think they are a E-commerce company, and they are. But they are also so much more, below I will give you a quick rundown of all their businesses.

Alibaba’s businesses

I’ll shortly describe a few of the most important ventures of Alibaba so you can get an idea of how well diversified this company actually is.

  • Taobao

Taobao is the biggest e-commerce website in the world, and currently the ninth most visited website according to Alexa Internet Inc (a webtraffic data company). According to the latest earnings report there are now 634 million monthly active users (MAU’s). The platform allows consumer to consumer retail (C2C), it does so by opening their platform to entrepreneurs and small businesses and allowing them to sell their goods to others.

  • TMall

This platform is much like Taobao, but for business to consumer retail (B2C). It actually spun of from Taobao and it facilitates Chinese and international brands to sell their wares to consumers in China, Hong Kong, Macau and Taiwan. You can think of international brands such as Unilever, Nike, Apple, Adidas, Panasonic, Timberland and many many more.

  • Alibaba Cloud

This is by far the fastest growing segment of Alibaba, their cloud revenue increased by a whopping 93% and the previous quarter it even increased by 103%. It recently announced after three years of operating in the US market that it was harder to compete with Amazon and Microsoft than they thought. They will back off from the US market for now and just focus on multinationals also needing cloud services in China. Other than this I think the cloud has a great potential especially with the growing internet users in Asia (China). This measure also shows that management is not afraid to ‘admit defeat’ and focus their time and efforts on more productive ideas.

  • Ant Financial

The company previously known as Alipay which raised $14 billion ahead of their IPO is also still a part of Alibaba. Alibaba serves as the parent company with a 33% stake in the company. At the 19th of May this year they had 520 million registered users, and the total payment volume was $519 billion.

  • Ele.me

Ele.me is a food delivery network, it roughly translates to ‘hungry now’ according to their Wikipedia page. It’s a online to offline business (O2O, don’t you love all these terms?). Lately they’ve in the news due to the announcement that Starbucks partnered up with Alibaba (and thus Ele.me) to deliver their coffee through the network of Ele.me. Back in July ’18 Ele.me had roughly 50 million active users every month.

  • Alibaba.com

This was the original business and it was made for business to business (B2B) sales. It helped smaller businesses that seeked to expand abroad how to deal with VAT, transport and other things alike.

  • 1688.com

This is pretty much the same as Alibaba.com, except that it’s aimed at the Chinese market and offers even lower prices because of this.

  • AliExpress

This is the platform most of us will know, it allows international customers to buy directly from Chinese manufacturers. It is very known for it’s often cheap products and world-wide shipping.

  • Hema

Hema grocery stores are outfitted with the latest technology. It’s a ultra modern self service mall. You can order chefs to make food for you which will be ready when you are done shopping, or you eat it in the store or you can even order it online before actually going to the store.

  • Alimama

This is the advertisement business which is comparable to Google’s business. According to similarweb.com Alimama’s traffic mostly comes from Tmall with 49,44% and from Taobao with 26,23%. Then there is so.com, Subway and Zuanshi.Taobao.com all with 3%.

  • Cainiao Network

This is a network to speed up logistics, it’s a company controlled by Alibaba together with 8 other companies. But Alibaba controls 51% of Cainiao. It tries to combine logistics with AI and big data.

  • Youku

It was started as the Chinese Youtube, where users uploaded content that other users could view. It’s slowly transforming into more of a streaming service, most recently they even had rights to stream the 2018 World Cup Football.

  • Furthermore there are businesses like Alisports, Alibaba Music, Tmall TV, AutoNavi and UC Browser. To many to get into all of them.

 

Main competitor JD.com 

Based on sales in China you can see Alibaba beats JD.com by an absolute mile. However JD should not be disregarded, simply because of their superior delivery service and warehousing. Where as Alibaba has little of the logistics under their own control, JD went the opposite route and build a mega logistics business. Also JD is more specified toward the e-commerce market than Alibaba, Alibaba is way more diversified and could be the safer bet, at least in the short term.

Source: eMarketer.

 

Both companies are very active in forming partnerships with all kinds of companies. JD however has formed partnerships with Tencent (maker of the very popular WeChat app), Google and Walmart just to name a few. This is adds to the facts why JD is seen as a very serious competitor as these companies bring a huge audience and advertisement expertise to the table.

Luckily, at least in my view, the Chinese e-commerce market offers more than enough room for two big powerhouses.

 

Recent quarterly earnings report

On the 23th of August Alibaba presented their quarterly numbers, the headline ‘EPS of $1.22 beats by $0.01, Revenue of $12.23B (+ 67.8% Y/Y) beats by $430M’ doesn’t really do it justice. If you’d dig in the numbers you would see something that would blow you away. Cloud services almost doubled their revenue with +93%, core commerce grew by a whopping +61%, Digital Media & Entertainment was up +46%, and the brands under their Innovation & Others was up +64% as well. 

Source: Alibaba June Quarterly Report.

The fact that they only beat EPS guidance by $0,01 is actually positive to me. It means the board is not resting while seeing all this money flowing in. It means they are actively choosing innovation projects and thinking about how to use their cash for long term profitability.  Their mobile MAU (mobile monthly active users) went up to 634 million from 580 million back in December. Annual active customers went up to 576 million from 515 million back in December.

The percentages of different revenue streams seem to be changing as well. Currently most of their profitability still comes from the commerce side. 86% of total revenue is earned through the commerce business. Back in December this was 88,22% so this means the diversification of revenue is growing in the correct direction. While commerce is the cash cow of the business it still grew at 61% YoY. And future cash cow segments are growing at almost double digits, we all know what kind of potential the cloud has, just look at Amazon and Microsoft for instance.

 

Trade war fears are overblown

The stock has seen some tough times recently, I believe this was because of the evergrowing trade war tensions between America and China. Even though Alibaba’s revenue is mostly from China itself and only a tiny portion comes from outside of Asia they have been dragged down with the general fear and maybe the weakening of the Yuan. The overall index in China is down more than 20% for the year, and it took down stocks like JD.com and Alibaba too. When America and China should make a deal for their trades I’m sure the general market and JD.com and Alibaba stock in specific should rocket back up.

 

Jack Ma retiring

On friday the 7th of September Jack Ma told a reporter that he compared himself to Bill Gates, but that Ma thought he would never beat Gates in wealth. But the big topic in this interview was that Ma actually said he could beat Gates in retiring earlier, and so we came to know that Ma will serve out his current term as Chairman of the Board for another year and then retire. He seeks to do more for the community through philanthropy and teaching.

Ma already gave up the CEO position to Daniel Zhang since 2013.

As Ma will still be connected to the company and the current CEO is most likely to follow in his footsteps as Chairman of the Board I’m most confident this transition will happen smoothly. Jack Ma meant a lot for Alibaba but I’m sure he has been bright enough to put a lot of energy in his replacement to protect the company he himself co-founded.

 

Investor takeaway

I believe the current pressure on the stock offers long term investors a great buying opportunity into one of the biggest Chinese internet companies and the biggest online retailer of China. The Chinese economy and middle class are ever growing and so is the internet usage in the country. At current levels Alibaba’s stock shows great value through current and next years P/E (50 and 21). It’s a well diversified company with long arms into a lot of different businesses and a strong position in the market.

 

Disclosure: I’m long 35 shares of Alibaba and 180 shares of JD.com

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4 Comments

  1. Thank you DI for that thoughtful review.

    I didn’t yet have a chance to do a proper analysis of Alibaba myself. But from what I‘ve been reading, it sounds like a mighty business, that is supposed to grow for a long time to come.

    The recent weakness of Chinese stocks makes Alibaba even more attractive. So, I will definitely keep it in mind for my next watchlist.

    – David

    • DutchIndependence

      Great to hear, it’s really worth looking into it. As you said, a mighty and diversified business, can’t go wrong owning a piece of it! Have a good week mate!

      DI

  2. Of only they paid dividends that would make them a possible target for me as well. 🙂

    • DutchIndependence

      I understand! I used to think the exact same, but I changed my mind a bit due to the opportunity and the potential monster dividends down the road. It’s nice to diversify a bit outside of DGI stocks too, but also I will stay true to the DGI ways!

      DI

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