Alibaba Group Holding Ltd Achieves Major Transaction Volume Milestone

  • Alibaba has achieved its target to triple GMV to 3T yuan by 2016.
  • The company has achieved that goal despite growing competition and a slowing Chinese economy.
  • Alibaba stock is bound to remain volatile despite good performance by the company due to investor worries about the Chinese economy.

When giant Chinese e-commerce player Alibaba Group Holding Ltd. (NYSE:BABA) achieved GMV, or Gross Merchandise Volume, of 1T yuan in 2012, it set an ambitious target to triple that GMV to 3T yuan ($462B) by 2016. Back then that target seemed like a tall order considering the tepid Chinese economy and growing competition from the likes of JD.com (NASDAQ:JD). But fast forward to 2016 and Alibaba recently announced that it had managed to achieve its target with 10 days to spare for fiscal 2016 ending March.

That mark implies that Alibaba’s GMV grew 23% compared to the previous fiscal year when GMV clocked in at 2.44T yuan. Alibaba is now eerily close to snatching the title of the world’s largest retailer from Walmart (NYSE:WMT) which finished 2015 with net sales of $478.6B. Alibaba says that it has managed to achieve that milestone by implementing its ‘‘Rural Taobao Initiative’’ through which it has been expanding its rural presence. Through the initiative, the company has set up free Internet-equipped computers in Chinese villages and hired officials to train local buyers and sellers. The company says that it has managed to cover 12,000 of China’s 600,000 villages so far. Alibaba has announced that it will buy a $4.6B stake in Chinese electronics company Suning Commerce Group in a bid to leverage its delivery network in the countryside.

Additionally, Alibaba is increasingly courting foreign brands and is now expanding into countries such as Brazil and Russia

Alibaba has now set another new and ambitious target to double GMV to 6T yuan ($924B) by 2020, implying the company’s GMV growth will clock in at 18.9% CAGR over the next four years.

GMV Growth Critical for Alibaba to Grow Market Share and Revenue

GMV is a closely watched metric in the ecommerce world, perhaps even more than revenue, because it gives a good idea of how fast a company is growing relative to its peers. The term is credited to eBay (NASDAQ:EBAY) which coined it back in the 1990s when its online auction business was just taking off. GMV is a rather loose term with no fixed definition. Its meaning varies slightly from one ecommerce company to another as you can see below:

BABA-2

Source: The Wall Street Journal

Alibaba’s GMV comprises of the value of goods bought on its sites as well as services such as movie tickets and travel bookings. Lately, however, many Chinese ecommerce companies including Alibaba have started including O2O, or online-to-offline transactions in their definitions of GMV. Though still small, O2O is a very fast growing business. Players in the space have, however, not started making money from the business yet.

Alibaba’s business is almost entirely driven by third-party transactions on sites such as Taobao and Tmall. JD.com is one of Alibaba’s biggest rivals and boasts considerably bigger revenue than Alibaba. For instance, during the last quarter, Alibaba reported revenue of $5.25B compared to JD.com’s revenue of $8.38B. Alibaba’s GMV, however, stands head and shoulders above JD.com’s. Alibaba reported GMV of $146.57B, up 23% Y/Y. Meanwhile, JD.com posted GMV of $22.29B, up 69% Y/Y.

When comparing the GMV of the two companies, it’s important for investors to take into account the differences between their business models. Whereas Alibaba is almost entirely a third-party ecommerce site, about 70% of JD.com’s revenue comes from selling merchandise (mostly electronics) directly from its site with third-party transactions accounting for just 30% of its top line.

GMV growth is important for a company like Alibaba because it makes it possible for the company to increase its market share. A bigger market share allows the company to charge a higher take-rate, or commission. Alibaba is most dominant in Clothing & Accessories as well as Household Products where it commands a 75% and 66% share of the market, respectively. Consequently, Alibaba charges a much higher commission of 5% on GMV for those two product categories compared with, say, Appliances where it owns 22% market share and charges just 1.9% commission.

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Source: TechCrunch

Alibaba can potentially increase its GMV and market share in categories where it’s not so dominant which would allow it to charge a higher take rate translating to more revenue. Alibaba charges a take rate of 5% in categories where its market share exceeds 30%. The company also caps its take-rate at 5%.

Alibaba stock has climbed more than 10.8% over the past one month. There are two main catalysts that have been helping namely the company beating earnings estimates during the last quarter and worries about the Chinese economy easing as I explained in this article.

Alibaba Stock Price 30-Day Performance

BABA stock chart

Source: Alibaba Group Holding Ltd stock price chart by amigobulls.com

The stock has, however, sold off 3% during two trading sessions over the last week, after the Shanghai Composite Index fell 1.6%. Alibaba and other Chinese stocks tend to be affected strongly by the performance of Chinese equity markets, which are in turn affected strongly by sentiments about the health of the local economy. This is the biggest risk when investing in Alibaba stock because it can easily negate strong individual performance by the company. Ultimately it’s not likely that investors will stop worrying about the Chinese economy any time soon. You can therefore expect Alibaba stock to remain quite volatile despite the fact that the company is actually doing well.

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