Alibaba’s [BABA] talismanic executive chairman and co-founder Jack Ma resigned from the e-commerce giant at the beginning of September. When Ma started the company he led a team of 18 people. Now Alibaba has roughly 102,000 employees and a $456.067 billion market cap.
This year alone, Alibaba’s share price is up 21%, seemingly impervious to the US-China trade war and a downturn in the wider economy.
In Ma’s place is Daniel Zhang, a man who is spearheading an ambitious 5-year growth plan.
What is Alibaba’s 5-year plan?
Alibaba announced its 5-year plan at an investors’ day in Hangzhou, China. There the company revealed it was aiming to double the volume of transactions on its platforms by 2024. The e-commerce company also revealed plans to have 1 billion active customers on its platforms in that time, or just over an eighth of the world's population.
At the event, Alibaba reiterated its 2020 revenue guidance of RMB500 billion - a jump of 35% year-on-year - showing that the company is still very much in growth mode.
Alibaba's daily active users goal for 2024
What’s going to drive growth in Alibaba?
Ant Financial goes public
Growing out of Alibaba's Alipay, Ant Financial recorded a £200 million in pre-tax profits last year. Alibaba and Ant Financial are closely related with Jack Ma heading up the fintech. Now Alibaba hopes to take Ant Financial public by taking a 33% stake in the company.
Ant Financial, which offers wealth management, insurance, credit cards and digital payment solutions among other financial products has been growing year-on-year. Around 730 million users and 23 million small businesses use the platform for their digital financing needs. Of those, 80% use three or more Ant Financial services, up from 40% last year.
According to the FT, Ant Financial is the world’s most valuable private fintech company. While analysts expect the IPO to be a drawn-out process, and unlikely to happen this year, a successful offering could see both Alibaba and Ant Financial’s share price soar in the mid to long-term.
Ant Financial's pre-tax profits from last year
Market penetration in rural China
Despite 85% market penetration in China’s developed areas, Alibaba has only 40% penetration in less developed areas of the country. This suggests that there’s still huge potential for growth. In the past two years, Alibaba has added 200 million active users in China alone, and 140 million internationally. Numbers that could continue to increase if it engages with people outside China’s bustling metropolises.
The sheer size of Alibaba’s business means new products benefit from an in-built audience ready to be cross-sold. Ant Financial alone delivers 20% of new users to Alibaba’s e-commerce platforms Tmall and Taobao, underscoring the effectiveness of the company’s cross-selling strategy. Traders would be wise to look for the importance of cross-selling to grow as Alibaba zeros in on its ambitious 5-year targets.
Ongoing cloud domination
AWS might be the world leader in cloud computing, but in China Alibaba’s Alicloud is number one. The service accounts for a 43% market share and is expanding aggressively throughout south-east Asia. This will be an ongoing growth driver, especially with Microsoft [MSFT] and Amazon’s [AMZN] ongoing problems gaining a foothold in the Middle Kingdom’s cloud computing market.
What do the analysts think?
Stifel Nicolaus analyst Scott Devitt reiterated his buy rating after Alibaba’s investor day. This also included his $225 price target on the stock:
“We are encouraged by Alibaba's continued expansion of consumer and enterprise services, steady market share gains, and a long-term investment focus on cloud, international, local services, offline retail, and innovation,” Devitt said.
Among the 48 analysts tracking Alibaba on Yahoo Finance, 18 rate the stock a strong Buy and 29 rate it a buy. Only 1 rates it a sell. An average price target of $222.97 would represent a 28% upside if hit based on the current share price. Lending its backing to Alibaba was Bank of America [BAC], which reiterated its buy recommendation on 6 September.
“We are encouraged by Alibaba's continued expansion of consumer and enterprise services, steady market share gains, and a long-term investment focus on cloud, international, local services, offline retail, and innovation” - Stifel Nicolaus analyst Scott Devitt
Is Alibaba a buy?
For investors looking to get into both e-commerce and cloud exposed stocks, Alibaba could be a good option. The stock trades at 19.08x to forward earnings with a price-to-book of 6.69. This is cheaper than western rival Amazon which trades at 51.96x and has a price-to-book of 16.06. Although Alibaba is a volatile stock with a beta rating of 1.81.
On the technical side, share price resistance might be found at the $180 level, which has been tested several times since the end of July. With the stock having broken below its 100-day and 200-day moving average (both near the $169 level), support might be found at $164. This level was hit in late August before a late summer rally.
|PE ratio (TTM)||47.46|
|Quarterly Revenue Growth (YoY)||42.00%|
Alibaba share price vitals, Yahoo Finance, 30 September 2019
What next for Alibaba?
Life after Jack Ma looks promising for Alibaba. While the resignation is an important turning point in the company, analysts don’t think it will adversely affect day-to-day operations.
“I don’t think it means that much, frankly. He stepped back from the CEO role about four or five years ago and very specifically made a comment about wanting the younger people to lead the company,” said Kevin Carter, founder of The Emerging Markets Internet exchange-trade fund.
As China’s e-commerce sector continues to grow, Alibaba’s dominance in the Middle Kingdom and potential to expand despite its mega-cap status, bode well for the end of 2020 and beyond.
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