Alibaba is the largest online commerce company on earth, reaching 960 million consumers globally, with 780 million of those in China. China’s online retail market is larger than the next ten markets combined. A staggering 80 percent of all online purchases in China are executed through Alibaba. Its platforms like Taobao and Alibaba.com facilitate transactions in exchange for a small commission. They do not hold or sell any merchandise themselves. Alibaba’s businesses extend into advertising, cloud computing and logistics. Its stock price has nearly tripled since its initial public offering (IPO) in 2014. However, the trade war, COVID-19 and a potential delisting of Chinese companies listed in the United States have strained the share price in recent months, presenting a good buying opportunity.
By the turn of the 21st century, a commerce-anaemic China was ripe for the picking. With hundreds of millions of cash-flush consumers, Alibaba opened for business at an auspicious time. A significant tailwind came from Chinese government regulations. Suspicious of foreign businesses, it imposed strict national internet control, locking foreign competitors like Amazon out of the Chinese market. China’s online retail has enormous growth potential as it represents only a quarter of total retail sales in the country. Alibaba benefits from the rise in per-capita income among the Chinese middle class that should enhance consumption appetite.
Alibaba delivered strong numbers in its latest results despite widespread lockdowns in February and March. Total revenue rose 35 percent and gross merchandise value surpassed $1 trillion for the first time. The core commerce business is Alibaba’s only profitable business and accounts for 86 percent of revenue. These profits subsidise the growth of the other businesses. The cloud business rose 58 percent on heightened digitisation demand. Alibaba also sought to ensure investors that it had no plans to delist after the US Senate passed a bill targeting Chinese stocks. There is a three-year compliance period after the enactment of the Act, allowing ample time for the regulators to negotiate and resolve differences. Alibaba is confident that it can comply with any new regulations. Furthermore, it is likely that influential major US Alibaba shareholders would advise the policymakers against moves prejudicial to their interests.
Alibaba dominates the largest online market in the world. It benefits from economies of scale and the ability to leverage its user base of nearly a billion. Its diverse revenue streams include commission, fee subscription and selling advertisement space. The company is building an ecosystem that can enhance user experience and create synergies among different business segments. Improvements in efficiency could significantly boost profitability. Its valuation is currently attractive, given its promising growth prospects and its relative undervaluation compared to peers such as Amazon, Pinduoduo, Tencent and Meituan Dianping.
Frants Preis, CFA is a portfolio manager at VEGA Asset Management based in Pretoria. Alibaba shares are held on behalf of clients.