In a recent article, Forbes pondered the notion that increased competition in China’s e-commerce market could drag Alibaba’s (BABA) share of the total e-commerce market from 85% to 60% over the long term.
Historically, companies with such control tend to lose market share in industries of immense size and growth as new competition enters the market. We’re already seeing that on a small scale with BABA.
Fortunately for Alibaba stock, the company doesn’t need to maintain this 85% share in order to produce continued growth and stock gains.
Why Lost Market Share Won’t Slow Down Alibaba Stock
In that somewhat bearish article I’m referring to, the Forbes author noted that if BABA’s market share sunk to 60%, its number of active buyers would be 466 million by 2021.
While short of the expected 621 million active buyers, it still represents a big increase from the 367 million that BABA reported at the end of June. So regardless of BABA’s market share, the company still grows, thanks to how fast China’s e-commerce market continues to grow.
Despite economic slowdown and concerns regarding consumer spending, China’s e-commerce market is still growing at a very healthy rate. EMarketer expects China’s total e-commerce sales to surpass $560 billion this year, growing more than 30% year-over-year. Sales are expected to grow 27% next year, and then 22% the year after before finally surpassing $1 trillion in 2018.
Thus, e-commerce sales will double over the next three years, which is why BABA stock will continue to grow revenue and active customers even if the company loses market share.
The Connection Between Facebook and Alibaba Stock
That said, Alibaba is very different from just about every other large e-commerce company in the world. It doesn’t create revenue from the actual transaction of merchandise on its e-commerce platforms.
Instead, BABA creates revenue by marketing and advertising brands or sellers to active buyers. That’s why it’s so profitable, with an operating margin over 26%, and why trailing 12-month revenue of $12.7 billion is so small relative to the gross merchandise volume that takes place across its site(s).
BABA is essentially an advertising/marketing company, and it is still relatively new at monetizing its business, which is why there’s so much upside for Alibaba stock, regardless if its market share increases, decreases, or stays the same.
Ironically, Facebook’s (FB) user and revenue growth over the past two years perfectly illustrates why BABA doesn’t need rapid active buyer growth, and why market share is irrelevant. In the first quarter of 2014, monthly active users only grew 15% year over year, but revenues grew more than 70% YOY. A year later, monthly active users had only grown 13%, but revenues were up another 42%.
FB’s revenue growth has significantly outperformed the rate at which it has added new users over the last couple years. Why? Its revenue per user has increased as Facebook has gotten better at monetizing its users, creating more effective advertising products. Furthermore, FB has managed to develop new ways to monetize its business outside of traditional display ads.
Alibaba stock has that same opportunity because of its business model. During BABA’s last quarter, its take rate was 2.33%. So for every $100 in gross merchandise sold on BABA’s sites, BABA earned $2.33.
While decent, a 2.33% take rate leaves a whole lot of room for improvement. Even if BABA could improve that ratio to $3.5% long-term, it would still be small relative to gross merchandise volume, but would create a 50% increase in revenue to couple with the continued active user and GMV growth that will naturally occur.
What About Alibaba Stock?
In retrospect, Alibaba has invested all of its time, energy, and resources to grow its GMV and active customers, much like FB did several years back. However, as the market matures and e-commerce spending tops $1 trillion in China, BABA is likely to shift its focus to becoming more efficient and monetizing its business better.
In other words, Alibaba stock represents a rare e-commerce company that has both vertical and horizontal growth prospects, and while the threat of decelerated growth in China and falling market share may have contributed to some of the recent loss in Alibaba stock, these fears are overblown.
Therefore, with Alibaba stock trading at just 27 times earnings, and possessing these kinds of growth opportunities, BABA has all the makings of a stock that investors should want to own long-term.
As of this writing, Brian Nichols owned shares of Alibaba.
