Alibaba Group (NYSE:BABA) reports quarterly earnings before the US market open on Thursday, May 18. Shares in the Chinese ecommerce company have risen by over a third in the last year and made a fresh record high above $120 this week.
With Amazon (NASDAQ:AMZN).com celebrating the 20 year anniversary of its initial public offering this week, it seems particularly relevant to discuss Alibaba, dubbed the ‘Amazon of Asia’. Alibaba’s core ecommerce business, like Amazon, makes up the bulk of its sales but unlike Amazon, ecommerce also makes up the bulk of its profits. Alibaba runs a platform for third-party sellers so it doesn’t do any direct selling. This gives Alibaba less control over its products (counterfeits are an ongoing issue) but it has very high profit margin because of the low overheads.
Alibaba CEO (and China’s richest man) Jack Ma does appear to be following Amazon chief (and one of the richest men in the world) Jeff Bezos’ business model. Alibaba is diversifying away from pure retail to becoming a technology solutions provider in areas such as data analytics, cloud computing and digital entertainment.
Positives
- It’s a good time for tech stocks – the top five US tech company (FAANG) stocks have made up around half of the gains in the S&P 500 this year
- Alibaba has positively surprised on earnings in the last four quarters
- Rival Chinese internet firm JD.com recently topped estimates and raised its guidance for the second quarter
- Online retail sales growth in China was 37% y/y in the first quarter (up from 31% in Q4)
- Overall retail sales in China has averaged 10% for the past two years
- The Cloud - Alibaba’s cloud services ‘AliCloud’ is on track to reach one million paying customers this year
- Digital entertainment expansion - paying members on its Youku platform have reached 30m
- A unified customer ID across its ecosystem (like google) will help cross-selling and marketing
Negatives
- China's economy has been losing steam this year and high debt levels risk a ‘hard landing’
- The Chinese stock market has been under-performing against other global benchmarks
- Alibaba is sacrificing near term profits to spend on ‘moon-shot’ projects
- Corporate Governance is weak and the SEC is investigating its accounting practises
Conclusion
Alibaba’s biggest attraction is that it is the leader in one of the fastest growing markets in the world – ecommerce in China. The expansion into other fast growing areas such as cloud computing, digital entertainment and gaming will offer further opportunity for sales growth and puts Alibaba into a position to consolidate its influence in China. Opportunity for growth outside Asia looks more limited. Expansion into new areas (moon shots) does bring an extra layer of cost which will eat into margin expansion in the near term. The quirky corporate governance structure means shareholders will have little ability to reign in higher cost projects. As the biggest China-based US listing, Alibaba is used as a proxy for China’s economy so will be exposed if China growth fears reappear in markets.
Consensus numbers
Revenue $5.2bn (+48% y/y)
EPS 66c (+50% y/y)
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