One of the key things we look for in a potential investment is whether company management is focussed on long-term value creation as opposed to being driven more by short-term performance. Alibaba took this to the extreme when founder Jack Ma stated, “we aspire to be a good company that will last for 102 years”. While 102 years seems like an odd target, it would mean the company spans three different centuries following its founding in 1999. This long-term focus coupled with a customer first ethos is one of the reasons Alibaba is a core holding in our international portfolio.
To achieve this goal, Alibaba is constantly innovating and investing to create and build out new products and services. The company describes this process as planting seeds for new businesses that could grow into material growth drivers five, ten or even twenty years later, even if it means lower profits today or disrupting an existing business.
Alibaba recently hosted its annual investor day, which not only highlighted the resilience of the business model during the pandemic, but also the breadth of long-term growth opportunities ahead of the business. Over the course of three days, company management set out their vision and strategy for the next ten years based around three core growth engines: domestic consumption, cloud computing and globalisation.
Continuing to drive the digitalisation of Chinese consumption
Despite already having over 700 million users on its Chinese ecommerce marketplaces, Alibaba estimates the addressable domestic market is 1.2 billion users, indicating large potential for further penetration. Coupled with increasing monetisation from new advertising formats and improved merchant tools, there is still years of strong growth remaining in what is Alibaba’s most mature business. Beyond that, Alibaba has several opportunities to further leverage the digitalisation of Chinese domestic consumption through its chain of Freshippo supermarkets, Cainiao logistics business, and food delivery and local services businesses. These three businesses are in the early stages of development and are all growing strongly, supported by the wider Alibaba ecosystem.
Leader in underpenetrated cloud market
On cloud computing, Alibaba continues to dominate the emerging and fast-growing Chinese cloud market with 42% market share. Alibaba Cloud is moving beyond the provision of basic cloud infrastructure into more value-added services from middle office solutions (digitalization, collaboration, and ‘internet of things’), right through to industry specific solutions. The combination of strong market growth and higher value-add is driving 60% revenue growth and improved profitability, with the cloud business expected to turn profitable in the next year.
Connecting brands and small businesses from all over the world
The globalisation opportunity is led by the Lazada business, a leading ecommerce marketplace in Southeast Asia. Ecommerce penetration in the region is below 5%, well behind China and other developed markets, however it is growing rapidly. Orders placed on the Lazada platform have quadrupled over the last two years. Alibaba continues to invest in infrastructure and user experience to build on its strong position in this fast-growing market.
We left the investor day with renewed confidence on the strength of the Alibaba business and ecosystem, the depth of the management team and the long-term growth opportunity. At the conclusion of the presentations, management reiterated its goal of two billion global consumers, 100 million jobs created, and 10 million profitable SMEs by 2036. Looking at the breadth of growth drivers and the company’s track record to date, we should expect Alibaba to achieve these lofty goals, even as it plants the seeds that will grow into the new products and services that will take the business towards its 102-year target.
