In the first 90 seconds of the recent Singles’ Day shopping festival, Alibaba sold a massive US$1 billion of goods. Singles’ Day then went on to break records again this year, with US$30 billion of goods sold on Alibaba’s platforms on 11 November (more than New Zealand’s total retail sales in a typical quarter). Alibaba’s sheer scale makes it the largest e-commerce player globally, and over the last decade they have fended off competition from global players like Amazon and eBay and now command 60% market share in the China e-commerce market.
Our rationale for investing in Alibaba is partly driven by this leading position in e-commerce, but also because of the huge potential we see in a number of Alibaba’s more nascent growth businesses - including its digital payments, cloud computing, and video streaming business units.
Alibaba’s Taobao and Tmall e-commerce platforms provide retailers with access to over 650 million highly engaged shoppers. As a result of this unparalleled consumer reach, Alibaba is a critical distribution and advertising channel for retailers and brands that want to reach the growing Chinese middle-class (including New Zealand producers like a2 Milk).
E-commerce in China has also been growing much faster than in the US and Europe. Even five years ago many people in China found themselves with increasing disposable incomes, but a limited selection of shops to go to - particularly outside of tier 1 and tier 2 cities. The arrival of mobile phones changed this, providing much of China’s population with access to the internet and Alibaba’s marketplaces for the first time. This sudden ability to order almost anything from a mobile phone (with delivery in a day or two) resulted in an explosion in e-commerce growth in China.
The Chinese middle class is expected to grow from 430 million people today, to approximately 780 million by the mid-2020s. This growth in the Chinese middle class, increasing consumption, and the broad reach Alibaba provides to retailers should drive years of e-commerce growth.
We expect Alibaba’s core commerce business to double in size over the next 4 years, and believe this business alone is currently worth $160 per share, slightly above Alibaba’s current share price of $150 per share. But the value we see in Alibaba goes well beyond its e-commerce business. Management’s long-term approach to building the business has resulted in a number of new businesses that should provide Alibaba with considerable growth, even when e-commerce eventually slows.
Payments, cloud & online video
Alibaba owns one-third of the leading digital payments business in China, AliPay. Alibaba was able to leverage its leading ecommerce position to create a digital wallet that was initially used to make payment for purchases on Tmall and Taobao. AliPay now has over 700 million users and due to the lack of credit card acceptance in China (and the prevalence of mobile phones), this has now become a popular way to pay for goods and services in shops all over China. AliPay is rapidly replacing the use of cash in China and its payment volumes are growing rapidly.
Much like Amazon, Alibaba has also leveraged its data center infrastructure to create a leading cloud computing business. Aliyun is the largest cloud computing platform in China and it generated over US$800 million of revenue in the last quarter alone – a figure which increased 90% compared to last year. This cloud business is still in its infancy and we see considerable growth ahead as Chinese businesses continue to move their data and computing infrastructure to the cloud. We believe Alibaba's scale (close to 50% market share in China) and first mover advantage provide them with a significant competitive advantage.
A third area of opportunity for Alibaba is its video streaming platform Youku, which includes both user-generated content (like YouTube) and professional content (like Netflix). Youku currently has over 500 million monthly users and it makes money through both subscription revenue and advertising. Alibaba’s digital media business grew revenue by 24% year-on-year in the most recent quarter.
The list of Alibaba’s adjacent businesses doesn't end there, with Alibaba also having positions in logistics (Cainiao), supermarkets (Hema), and food delivery. These examples simply help illustrate that Alibaba is a lot more than just an ecommerce business. Alibaba has been extremely successful leveraging its core business and user base to build new businesses that should provide many years of growth.
We believe that Alibaba’s payments, cloud, video, logistics and other investments are worth approximately US$100 billion, or another $40 per share. Combined with its core commerce business, Alibaba could conservatively be worth $200 per share, more than 30% above Alibaba's current share price.
Following a decline in the broader Chinese share market this year, we believe Alibaba is now significantly undervalued and have used recent share price weakness to add to our position. We see this as an attractive opportunity to invest in a business with a multi-decade growth runway.