International Expansion To Accelerate Alibaba Growth

  • Jack Ma recently announced that Alibaba will soon launch a global version of its C2C platform, Taobao.com
  • The Taobao platform has cost efficiencies compared to Amazon and eBay, which will negatively impact the profitable third party sales of Amazon and also eBay’s marketplaces segment.
  • An international launch will provide Alibaba with another lever of topline growth, which can lead to exponential earnings growth given the huge profit margins of company.

Jack Ma, CEO of Alibaba (BABA), the Chinese e-commerce behemoth, recently announced that Alibaba will be going global in the C2C (Consumer to consumer) segment with an international version of its China focused marketplace Taobao. An international C2C presence could translate into exponential growth, if Alibaba can replicate its success in China globally. We had highlighted in our Alibaba earnings review as to how growth in gross merchandise value and increasing mobile penetration will continue to drive Alibaba’s future growth. In combination with attractive Alibaba valuation post IPO, the international launch will accentuate Alibaba’s rapid growth and could create additional wealth for Alibaba investors. We look at the detailed implications of Alibaba’s global presence in the C2C marketplace segment.

Alibaba’s international C2C platform to be launched soon

According to a recent post on Reuters, Jack MA, announced that Alibaba will set up an international C2C marketplace platform, modeled on the lines of its hugely successful Chinese C2C marketplace, Taobao. The platform will serve international shoppers in multiple languages, including Chinese as well as English. The platform will have direct implications to three companies; Amazon, eBay and Alibaba. While the platform could provide incremental growth levers to Alibaba, it will impact eBay’s marketplaces segment, which is a significant share of its total business and also compete directly with Amazon’s rising third party sales.

The Taobao and Tmall businesses account for nearly the total GMV (Gross Merchandise Value) of Alibaba, and an international expansion could drive this higher and lead to a dramatic improvement in sales. In 2003, Taobao forced eBay out of China and Amazon has struggled to get a foothold in China. Will Alibaba’s global launch push eBay and Amazon further back? We look at the potential impact on Amazon and eBay.

Impact on Amazon third party sales and eBay

In a post on SeekingAlpha, the author concludes that Amazon third party sales are the most profitable segment at the firm. The same article also points out that buyer/seller costs of selling on Amazon and eBay are nearly twice that for sales on Alibaba. In the background of such cost differences, a global launch of Alibaba will have a direct impact on Amazon’s third party sales. Amazon’s third party sales will be faced with pricing pressures which will directly impact Amazon’s commission and profitability from this segment. As a result, Amazon could go from unprofitable to hugely unprofitable due to a global launch of Alibaba’s C2C e-commerce platform.

The impact on eBay, among the more popular global marketplaces for C2C e-commerce, will be huge. eBay shares a cost structure similar to Amazon’s third party sales and will be undercut by Alibaba on pricing. The impact will be a hit to eBay’s solid profitability. Moreover, marketplace revenue makes up nearly all of eBay’s e-commerce revenue and a global Alibaba will threaten this segment, which generated close to 50% of eBay’s Q3 2014 revenue.

Conclusion

Alibaba’s plans for global expansion should come as no surprise. The recent record setting Alibaba IPO helped the company raise close to $25 billion. Jack Ma had stated, at the time of Alibaba IPO, that the company will strongly expand in the US and Europe, post its listing. The latest announcement was in-line with his earlier statements. Moreover, the cost efficiencies could put pricing pressures on Amazon and eBay while giving sellers/buyers to transition to Alibaba’s global platform.

In conclusion, the international expansion will provide Alibaba with increased growth levers, which in combination with its hugely profitable operations, can lead to exponential earnings growth over the coming years.

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Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions. Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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