Last week, Alibaba (BABA US) hosted its annual investor day in Hangzhou, China. It has increasingly become China’s marquee technology and investor event as investors, media and other stakeholders gather to hear from Alibaba founder and Chairman, Jack Ma and his management team.
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So, what did we learn from the investor day to make us term Alibaba as a “growth monster”?
1. 2018 revenue growth guidance surprised the market
Prior to the 2017 investor day, analysts forecasted Alibaba growing its revenues by 35% for 2018.
The company blew that out of the water, forecasting revenue growth instead of 45% to 49%, which took the market by complete surprise as the stock rallied 13.3% the following day, giving Alibaba a market value of US$360 billion, 50% larger than Wal-Mart (WMT US).
However, was it really that surprising considering Alibaba generated 56% revenue growth in 2017 and has average 52% revenue growth for the 5 years to 2017?
As it continues to dominate China’s e-commerce market (accounting for 80% of China’s online sales according to Bloomberg), Alibaba is focused on greater monetisation of its consumer base as well as investing in other high growth businesses (as discussed below).
Greater monetisation in Alibaba’s eyes means increased mobile monetisation via its 507 million monthly active users as well as driving user engagement through content in areas such as video, music, gaming, food and entertainment. It is investing heavily in areas such as artificial intelligence, speech and image technology and big data to improve online marketing, procurement and fulfilment as well as customer service among other services. It’s all with the view that the longer the consumer is on the platform …
“The More Orders They Place, The More Categories They Purchased, The Higher the Spend”.
As it has scaled up, Alibaba has grown its adjusted net income to US$8.4 billion with a compounded average growth rate (“CAGR”) of 43% from 2013 to 2017.
2. Ambitious long term goals are the first leg of the growth story
For its e-commerce business, Alibaba generated gross merchandise value (“GMV”) of US$547 billion in 2017 but is aiming to almost double this to US$1 trillion by 2020. GMV has already grown by at a CAGR of 37% from 2013 to 2017 – so is this US$1 trillion goal realistic?
We believe it is realistic as it requires the business to generate a CAGR of about 23% from 2018 to 2020, which is very much possible especially if you consider the fact that Alibaba currently only accounts for 11% of China’s retail sales.
With currently 454 million annual active consumers in China and another 83 million in other markets, Alibaba has a long-term goal of growing this consumer base to 2 billion in the next 20 years. Again, its ambitious but not when you think about how much Alibaba has achieved in the last decade.
Also consider these facts about the scale of the Chinese market compared to the U.S. market:
- China has 147 cities with at least 1 million people with a population 4 times the size of the U.S.
- In 2015, the size of e-commerce market in China was US$663 billion in GMV compared to US$343 billion in the U.S.
- Package volume has grown at close to a CAGR of 50% from 2014 to 2016 in China versus 6% in the U.S.
3. Cloud business is the second growth engine
Like Amazon.com, Alibaba has not simply settled into its comfort zone of being just a leading e-commerce retailer and marketplace. It is aggressively growing adjacent businesses including cloud computing and digital media as well as making significant investments in payments and logistics.
Its cloud computing business has grown revenues with a CAGR of 115% in the last two years and has quickly become China’s leading cloud platform with 874,000 paying customers and 15 data centres around the world. To put that into perspective, Amazon Web Services grew at a CAGR of 88% prior to reaching its first US$1 billion in revenues.
Gartner estimates that the public cloud market will grow from a US$209 billion industry to a US$436 billion industry by 2021. The market is led by Amazon Web Services with a 46% market share but remains fragmented with the next 4 providers (Microsoft, IBM, Alibaba and Google) having a combined 18.5% share according to IDC. As such, there is plenty room for growth, particularly in China where Alibaba dominates – it has 41% of the Chinese market and is the same size as the next seven largest cloud providers.
4. Digital media business is the third growth engine
Alibaba launched its digital media entertainment business in 2014 and has since created or acquired several music and video businesses to bulk up this arm of Alibaba. It sees digital entertainment as a natural extension of its e-commerce business, where its vast e-commerce user base also wants to be entertained as they shop. A great example of this is Alibaba’s Singles Day, a sales event that generated GMV of US$17.8 billion in 2016. Singles Day was broadcast over Alibaba’s Youku video streaming platform to create an additional user experience, which in turn also generated more sales. In comparison, the combined sales for Black Friday and Cyber Monday generated GMV of US$5.8 billion in the U.S. in 2017.
Whilst this business remains small for Alibaba, having generated US$2.2 billion in revenue in 2017, it has enormous potential as its extends into adjacent areas such as movie production, ticketing and promotion of live concert performances.
We have outlined 4 big reasons why we have termed Alibaba a “growth monster” but the reality is that there are far more growth avenues for a company in Alibaba’s position, particularly if it can successfully cross-cultivate its three major businesses – e-commerce, cloud computing and digital media. Its track record suggests it can also profit on its other investments in areas such as logistics, payments and content generation. We are only at the beginning of the journey with Alibaba and this growth monster shows no signs of being tamed anytime soon.
At the time of writing, the AtlasTrend Big Data Big Fund owned shares in Amazon.com and the AtlasTrend Online Shopping Spree Fund owned shares in Amazon.com and Alibaba. As an AtlasTrend member you can see the full portfolio in AtlasTrend’s managed funds and find out more about why we have invested in these companies.
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