I have had a fairly long association with Alibaba (BABA), when I first invested in the business in early 2016 when irrational fears for the health of the Chinese economy sent the stock price down in the mid-$ 60 range. While I have later averaged the position of the Project $ 1M portfolio since then, I feel that the business is as good now as it ever was, and I still see the promise of a fairly good future return.
Alibaba is now in a sweet spot as far as having market-leading positions in China in three world-class businesses across e-commerce, digital payments and cloud, each of which has received a significant tailwind as a result of the pandemic, and which now appears set to drive Alibaba's overall business growth for at least the next five years or more.
The e-commerce business is booming
The pandemic has been a boon for Alibaba's e-commerce business so far as to provide tailwinds that have increased the near-term trajectory and growth rate of the business. Alibaba's core trading platforms saw an increase in the growth rate from 22% before the pandemic to 34% last. This reflects the effect that has been seen on other global e-commerce platforms such as Amazon, MercadoLibre (MELI) and Sea (SE).
While some of the growth of this e-commerce platform may be moderated as pandemic-related restrictions are light in China, my expectation is that the growth of e-commerce will be at an elevated level compared to that before the pandemic. Alibaba's e-commerce grave also continues to expand with the business further expanding monthly active users to 874M, a figure that was up 20M sequentially compared to the March quarter and up almost 16% compared to 755M monthly active users from the same period in 2019.
TaoBao and Tmall have a majority penetration of the total Internet users in China, which speaks to the dominance of both marketplaces. Alibaba continues to innovate in both of these trading markets. The newly introduced Taobao Pass program provides a 30% increase in ARPU for the users who joined. Gross volume growth for goods on both properties has recovered strongly after the initial decline caused by reduced consumption expenditure in the midst of the pandemic.
Alibaba believes there is significant growth ahead of its business and has set a long-term goal of serving more than 1B consumers in China, achieving more than $ 1.4T in gross goods volume across its trading platforms over the next five years. To achieve this growth, Alibaba is making a more proactive effort to attract users in Level 3 and Level 4 regional centers. To achieve this, it has also tailored the product offering through programs such as Taobao agreements, a more price-sensitive offering to value-conscious consumers.
It is not only Alibaba's trading markets in China that have seen strong growth. Alibaba has a significant presence in the Southeast Asian e-commerce market through its ownership of Lazada. Lazada has undoubtedly even more potential growth compared to e-commerce in China, given penetration rates at low single-digit percentages across many of the markets in Southeast Asia such as Vietnam, Thailand and Indonesia. Lazada also recently recorded over 100% revenue growth in this market over the year, with the company still engaged in a very tight battle with Tencent (OTCPK: TCEHY) supporting Sea Limited. ] Alibaba Cloud has a dominant market leadership in the Chinese market. The business has consistently had a market share between 40% and 50% for cloud computing, with analysts estimating that Alibaba's cloud market share is currently close to 45%.
Source: Canalys, June 2020
In line with global trends, the pandemic has accelerated the distribution of cloud-related services from companies to ensure business continuity. In the June quarter, Alibaba's Cloud Computing revenues increased close to 60% the year before. While other players have made marginal inroads, the business still maintains a very significant lead over other competitors.
During Alibaba's last investor day, BABA indicated an expectation that the cloud computing business will achieve cash flow in some way point in 2021, which marks a significant turning point for the business from a significant investment in product maturity.
Alibaba cloud properties consistently score well on independent external analyst services such as Gartner, where the business has been part of Gartner's magic quadrant for 4 consecutive years with strong rankings across networks, security and database. At Alibaba's investor day in 2020, the company estimates that the sliding growth among large premium customers increased by more than 40% in the last two years.
Source: Alibaba 2020 Investor Day
Alibaba's growth in the cloud computing market in China will be decades. It is currently estimated that only 3.4% of total IT spending of $ 402B is currently directed at the public cloud in China, a market that is estimated to grow at an almost 40% annual rate over the next five years. Alibaba's hidden jewel in financial services
Alibaba has a 33% stake in Ant Financial, the leading digital payment company in China, which is now to be announced. Ant has over 700 million active users every month on the Alipay payment platform. Ants are an integral part of the financial landscape in China, and are involved much more broadly than just payments within the economic ecosystem in China.
Source: Alibaba 2019 Investor Day
Ant has a basic health plan product Xiang Hu Bao that has helped insurance companies sell health insurance on the AliPay platform. Ant is a commercial lending platform, MyBank provides commercial loans to micro-traders. More recently, Ant has partnered with Vanguard to provide asset management services to AliPay users. In many of these initiatives, Ant acts only as a technology interface or enables traditional insurance companies, lenders and asset management companies to carry out the origin of the loan, take the insurance risk or provide asset management services.
This has led to a particularly attractive financial profile for Ant. In documentation for the upcoming IPO, Ant revealed a business that generated $ 10.5 billion in the first half of 2020, increasing revenues by over 30% over the year, and gave a profit close to $ 3B in the same time period. Valuation estimates for Ant & # 39 ;s business suggest a valuation close to $ 300B. This has provided a nice tailwind for Alibaba's share price in recent months.
However, Ant is not only important to Alibaba simply because of the increasing value of the shareholding and to unlock value-added realization for Alibaba. There is also a fairly close data exchange between the companies, with Ant's IPO disclosure highlighting the data sharing that takes place between Alipay and the other Alibaba companies, and helping with offers and recommendations to users about BABA's e-commerce and other properties based on Ant user data . Ants undoubtedly have a long growth path ahead, which will lead to further opportunities for further revenue generation by Alibaba.
Source: Alibaba Investor Day 2019
Valuation and long-term growth
Consensus estimates suggest that Alibaba should at least double revenue over the next five years, and revenue is likely to grow at a rate closer mid-20% over the next 5 years. This can be rationalized by the fact that Alibaba has dominant market positions in three secularly growing markets in China within e-commerce, cloud computing and digital payments.
Source: Seeking Alpha Premium
For all this growth, Alibaba is trading at a relatively undemanding Price for sale several times 10 times sales and a P / E multiple of approximately 30 times earnings, both within the areas in which it has traded during the last 5 years. On this basis, I believe that Alibaba should at least double in price over the next five years, if not more.
Although Alibaba has a relatively protected position in the Chinese trade landscape, the risk of regulatory intervention as a result of this position and the enormous data it has on the Chinese consumer always remains a constant threat to the business. . Alibaba also faces an equally determined and aggressive competitor in Tencent that has ambitions, if not dominant market positions, in many of the areas that Alibaba is pursuing.
Alibaba has shown its intention to be particularly prone and invest significant capital to pursue new growth opportunities, which could lead to depreciation if investments are not pursued in a disciplined manner, and more as a result of competition with Tencent.
While Alibaba has had a strong run in 2020, with a stock price increase of almost 80%, and although it has more than quadrupled since the low point in early 2016, I think Alibaba still has a very bright and promising perspective and should reward patient investors well in the long run.
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Information: I am / we are long BABA, TCEHY, SE, MELI I wrote this article myself, and it expresses my own opinions. I do not receive compensation for that (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.