Alibaba Has Multiple Growth Channels

  • AliCloud growth was a standout performer in fourth quarter earnings results.
  • Overseas expansion may prove difficult in the near term but it has huge tailwinds in its domestic Taobao & Tmall platforms.
  • Alibaba's sheer scale should see it maintain its peer-leading profits against tough competition such as Vipshop &

Alibaba (NYSE:BABA) may be down just over 2% year to date but I see this trend reversing especially if its recent fourth quarter earnings are anything to go by. The e-commerce company saw strength across the board. From its traditional marketplaces to divisions such as Alicloud and AliExpress, growth was buoyant and I feel it will continue. Why? Well, although the Chinese economy may be slowing down on a GDP basis, it is definitely switching from a fixed asset economy (based on building infrastructure) to consumption driven economy which should suit Alibaba.

We can see this in the numbers as buyers increased by 20%+ in the fourth quarter and GMV (Gross merchandise volume) increased by 24%. Increasing buyers and goods sold is all well and good but we are also seeing users spending more on an average basis which is really encouraging. Alibaba definitely has multiple growth triggers which should protect it going forward in the event that one of its divisions comes under pressure.

Jeff Bezos came out recently and stated that Amazon's AWS division will surpass $10 billion this year. Alibaba's AliCloud may have only done 1.1 billion RMB in this latest quarter but the division continues to grow meaningfully which should mean a re-pricing of the stock in quarters to come. AliCloud now has more than 500,000 paying customers and what looks positive is that the uptake of more expensive products among these customers is increasing which explains the explosive growth.

Therefore, expect the number of products and services to keep increasing meaningfully in AliCloud (612 features launched last quarter) especially higher priced data products where the company can charge its clients more. Furthermore, although Alibaba is continuing its strategy of rolling out its cloud based services on a global scale, its aim (especially in the US) is to get the business from Chinese companies operating abroad. It can do this by building data centers abroad especially near clusters of Chinese companies. This will serve Alibaba well going forward and bring more diversification to its operations.

Now some bearish analysts state that Alibaba has to start looking for external growth triggers in case the Chinese economy were to deteriorate from here. I don't totally agree with this point of view, especially in the near term. Why? Well, the e-commerce company still has only 423 million users on its books which is less than a third of the Chinese population. Furthermore, on the selling side, revenues continue to improve which demonstrate that more and more high priced products are making their way onto Alibaba's platforms. 

This demonstrates again that the middle class is definitely rising in China as otherwise we wouldn't be seeing this trend of rising revenues per user on its platforms. On top of this, the Chinese e-commerce industry is expected to top $1.1 trillion by 2020 which is still a sizable leap from where we are at the moment. In 2015, Chinese online shoppers spent around $670 billion and with Alibaba's ecosystem responsible for around 10% of all retail sales, I see the company gaining more of this "pie" going forward because of the market share it has already cemented in the country. All Alibaba needs is for the Chinese economy to turn up, which would get more people working and thus would propel them onto their proven Taobao and Tmall marketplaces.

In this business, size is crucial as the company's sheer scale can be used to drive profits by being able to leverage its fixed costs as it grows its users and product portfolio. Bears recently have been harping on about the fact that competitors such as have been eating into Alibaba's market share which must be so ('s revenue growth is faster than Alibaba at present) but Alibaba is still China's most profitable eCommerce entity with gross margins of 67.2% and operating margins of 28.2%, respectively.

However, operating margins have slipped in recent years and for good reason. Since the IPO in 2014, Alibaba has been investing heavily in areas such as media, entertainment and food delivery. These multi-billion dollar investments are going to hurt margins in the near term but will provide huge potential for the company going forward. The balance sheet is still rock solid as the debt to equity ratio has actually dropped from 1.05 in 2014 to 0.25 presently which is a testament to how the company has almost tripled earnings within this time period.

To sum up, Alibaba stock, I believe, is undervalued at present at around $80 a share. AliCloud continues to charge ahead plus its established market place platforms continue to grow volume and buyers respectively. Furthermore, the company has huge potential in the media and entertainment spaces and with a little luck and patience, Alibaba can gain real traction in these areas which will take some pressure off its established divisions.

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  • I do not have any business relationship with the companies mentioned in this post.
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