Alibaba [BABA] has trumped key rivals in China, namely Amazon [AMZN], after a Reuters article announced Bezos’ intention to pull out of the region by July, on 17 April. Alibaba shares are up 36.8% year-to-date (YTD), as they currently trade around $187.41, and are marginally up by 0.50% since Amazon’s announcement.Alibaba 1-year share price performance, CMC Markets, 30 April 2019
The news spells an uncommon defeat for the Seattle-based powerhouse, which had been active in the country since 2004 after acquiring Chinese online website Joyo.com for $75m. However, the ecommerce company found gaining traction in China difficult, making progress impossible. Similar to Facebook [FB] and Google [GOOGL], Amazon only has a 1% market share of the commerce market in China. Alibaba, meanwhile, is now set to exert a phenomenal amount of control over a market it has already largely monopolised. As it stands, the company has a 59.2% market share of sales in retail ecommerce.
Alibaba stock has been on a steady rise since a January 2019 low of $130.60, and while the Amazon exit is positive for the company, its stock has not exactly shot up in reaction - in part due to Chinese equities being under pressure, as the Trump-engineered trade war continues on while the Chinese economy slows.
The Chinese conglomerate’s predominant position in the country is unrivalled. Its online retail market wing, Tmall, enjoys a 59.5% share of the space in China followed by JD.com with 25.8%, and this is just one element of its wider ecosystem of component companies. Other subsidiaries include Taobao, China’s largest online consumer-to-consumer shopping site and Juhuasuan, which is China's most popular group-buying marketplace. Two-thirds of Chinese consumers rate these websites as their most frequently used online marketplaces, bringing Alibaba’s control of the e-commerce market in China to over 50%.
|PE ratio (TTM)||53.46|
|Quarterly Earnings Growth (YoY)||37.60%|
Alibaba stock vitals, Yahoo finance, 30 April 2019
China is one of the world’s largest internet markets with 802 million people actively using the internet according to the government, and Alibaba’s pre-eminence there is set to continue. The company, according to market analyst Marcello Pinto, “has economies of scope”. “There are massive cost savings associated with selling different products by one conglomerate,” he wrote in a Seeking Alpha article.
Pinto argues that it is this scale that allows the company to save costs. “The company hit $50 billion dollars in revenue last year, which sets it apart from any other e-commerce operation in China,” Pinto wrote. “Alibaba operates with a network effect. Given that the company has thousands of merchants who join its platform and promotes entrepreneurship in China, the larger the network, the more valuable the business becomes… Alibaba uses a revenue share model rather than charging listing fees. This makes it easier for more merchants to join the network. The larger the network, the greater the benefits for each merchant, as it attracts a large volume of customer traffic.”
Alibaba also has a strong relationship with the Chinese government, a crucial element of any major company’s puzzle to make it in the country. The company has engineered a strong hand in C but its what’s to come that might excite investors. China’s online retail market is forecast to grow to $1.8tn by 2022, according to a report by Forrester, and with only 38% of the country shopping online, there is plenty room for growth.
“... The larger the network, the greater the benefits for each merchant, as it attracts a large volume of customer traffic.” - Market analyst, Marcello Pinto
“New Retail” strategy drives growth
The company has also taken steps to consolidate the bricks-and-mortar retail sector with former executive chairman and co-founder Jack Ma’s "new retail" initiative, which includes the likes of robot-powered Hema supermarkets and Freshippo department stores. According to Pinto, “the new retail initiative helped drive a 344% year-over-year increase in "other revenue" to more than $1bn in Alibaba's fiscal 2019 first quarter. The “new retail” strategy also helps to expand Alibaba's total addressable market to include practically all of China's economy.
“Even with a $40bn annual revenue base, Alibaba has tremendous room for growth ahead. Alibaba's strategy is clearly one of expansion. The company is seeking to capture as much of the Chinese market as possible in as many different sectors as possible. In this sense, it mirrors Amazon.”
But although the world’s second-largest economy reported a year-over-year increase in growth of 6.4% in Q1, government stimuli is still needed, as it looks as if this will be tapered somewhat. “We believe the pace of monetary easing will slow, but it is still too early to withdraw monetary easing measures despite the limited monetary policy scope,” Nomura economists said in a note.
Meanwhile, BABA shares are up 36.8% YTD and are trading just 10% off all-time-highs reached in June last year – a significant break-out could well ensue if shares were able to breach this level. A break out above the $190 level could trigger a rally north of the $200 mark, the latter representing an 8% upside based on current levels.
BABA shares' year-to-date growth
Alibaba had $15.8bn in free cash flow in 2018 and is trading at almost 34-times its earnings. But how compelling is the stock going forward? Bret Kenwell, a market analyst writing in Investor Place says: “That leaves BABA stock trading at 33.8 times earnings, which doesn’t exactly feel like a discount. On a forward basis, Alibaba stock trades at roughly 28x forward earnings. That’s actually slightly below its five-year average of 29x forward estimates. Ultimately, some investors will feel uncomfortable paying 34 times current earnings and that’s just the way it is.”
The company’s next earnings report is in June, which will likely deliver a clearer idea as to whether it will hit a 55% revenue increase in 2019 or not, as well as the expected 15.6% earnings improvement to $5.48 per share.