Alibaba Group Holding Ltd (NYSE:BABA) has committed over $30 billion in investments and R&D to drive future growth.
Last week, Chinese eCommerce giant Alibaba Group Holding Ltd (NYSE:BABA) had wrestled away the crown of largest eCommerce company in the world from Amazon.com Inc (NASDAQ:AMZN), albeit, for a brief period. While both, Amazon stock and Alibaba stock have had a good year so far, the rally in Alibaba stock has outstripped Amazon stock rally by a wide margin. In fact, Alibaba stock has more than doubled the year-to-day period. Alibaba stock has gained on the back of better than expected performance, improved guidance and also due to continued investment for future.
Alibaba recently announced its plans to invest more than $30 billion in the next few years. This investment includes $15 billion in its logistics arm Cainiao Smart Logistics Network and another $15 billion in tech research and development over the next three years through an academy called Alibaba DAMO Academy. Alibaba has been making huge investments over the past years. Last year alone, the Chinese eCommerce powerhouse reported an outflow of more than $11 billion from investment activities. In the first quarter of this year, the company invested another $2.05 billion.
Multi-billion dollar investment in fast growing markets.
Alibaba has been investing heavily in South-East Asia and India, two of the fastest growing geographies in the world. Last year, Alibaba had invested $1 billion in Lazda group, one of the largest eCommerce operator in the region, for a controlling stake. Alibaba recently topped its investment in the company by another $1 billion. Recently, Alibaba lead $1.1B investment in Indonesia-based e-commerce firm Tokopedia. A recent report co-authored by Google expects annual e-commerce spend in South-East Asia to jump from $5.5 billion in 2015 to $88 billion in 2025. The Indonesian eCommerce market alone is expected to grow from $8 billion currently to $65 billion by 2020. This is a massive growth opportunity for Alibaba.
Alibaba has also been investing heavily in India. In 2015, the company had invested over $500 million in One97 communications, parent of eCommerce and payment platform PayTM. Alibaba had further invested $177 million this year in PayTM mall to take its stake above 50%. Recently, Alibaba along PayTM led the $280 million funding round of BigBasket.com, one of the largest online grocer in India. A recent research report by Forrester valued India’s grocery market at $428 billion, making it the third largest grocery market in the world after China and U.S. However, only 5% of this is estimated to be organized meaning that BigBasket has strong growth potential.
Taking control of Cainiao.
Alibaba has announced its intention to up its stake in its logistics arm Cainiao Smart Logistics Network from 47% to 51% with an investment of 5.2 billion yuan ($800 million). It was the very same company which had brought Alibaba under the SEC scanner for its accounting practices. SEC had asked Alibaba why it was not consolidating financials of Cainiao on its books. With the investment, the company will also be consolidating the results of the delivery business in its financials. Consolidation of financial statements will have an impact on Alibaba's financials, however, according to MKM Partners, consolidations of Cainiao's financials won't dent Alibaba's overall profits.
In addition to the $800 million investment for 4% stake, Alibaba has also promised to invest 100 billion yuan ($15 billion) over five years to build out a global logistics network. This underscores Alibaba's aggressive expansion plans overseas. Delivery is a big part of Alibaba's plan to dominate the eCommerce business. These investments are expected to enhance the overall logistics experience for consumers and merchants across the Alibaba ecosystem, as well as lower costs through greater efficiencies.
Alibaba plans on fulfilling orders in China within 24 hours and within 72 hours anywhere in the world. "Our commitment to Cainiao and additional investment in logistics demonstrate Alibaba’s commitment to building the most-efficient logistic network in China and around the world," Alibaba CEO Daniel Zhang said in a statement.
R&D spending will continue.
Further, Alibaba has also pledged to invest RMB 100 billion (US$15 billion) on research and development over the next three years through its newly established Alibaba DAMO Academy. As per the press release, the Academy, "which stands for the Academy for Discovery, Adventure, Momentum and Outlook, will oversee the opening of research and development labs worldwide and seek to recruit talented scientists and researchers to join the program".
Initially, the Academy will set up seven research labs which will focus on broad areas such as data intelligence, Internet of Things (IoT), fintech, quantum computing and human-machine interaction. It will include topics such as machine learning, Natural Language Processing (NLP), etc. The labs will collaborate with experts and institutes on different topics. The labs will help solve issues that Alibaba is currently facing across its business lines.
The $15 billion R&D allocation for next three years is 2.34x the amount Alibaba has spent in research and development in the previous three years. However, if you look at R&D as a percentage of revenue, $15 billion is not a huge increase. That's because Alibaba's revenues are also forecasted to grow at a tremendous pace. Alibaba's revenue is expected to more than double from 101 billion CNY in 2016 to 235 billion CNY in 2018. With $15 billion R&D expenditure over the next three years, R&D will continue to make up around 10% of revenues, which has been the case in the last two years. This is less than nearly 12% R&D spend by Amazon and 21.4% by Facebook.
The recent rally in BABA stock has also led to multiple expansion. PE ratio (ttm) has jumped from 34x a year ago to 62x while PS ratio (ttm) has increased from 14.47x to 17.58x. However, we must also take Alibaba's rapid growth and huge profit margin into account. The stock is trading at a more reasonable forward PE of 26x. Alibaba's plans to invest in the fast-growing geographies and logistics will keep its revenue growth going. Alibaba stock still remains a good long term buy.
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