Alibaba Group Holding Ltd (BABA) may have fallen significantly in response to earnings, and may still be well off its 52-week highs, but the company is executing to perfection in one key area that is critical for its long-term success.
That area is how it monetizes the gross merchandise volume (GMV) that passes through its site(s), or its take rate, which implies bullish long-term prospects for BABA.
What Makes Alibaba Different
Alibaba is unlike your typical e-commerce company that creates revenue from the actual sale of products. Alibaba is more of an advertising/marketing company, creating revenue from ads and by selling higher placement to retailers.
Fact is that BABA stock has fallen in recent months because investors are concerned about slowed growth in China. Furthermore, many have pondered the notion that maintaining an 85% share of the Chinese e-commerce market is unlikely, and that a long-term target of 60% is more likely.
Clearly, such market share losses would appear to reduce Alibaba’s growth outlook.
However, Alibaba’s ability to grow revenue and profits is not necessarily tied to how quickly it can grow GMV. Instead, Alibaba’s outlook is tied to how quickly it can increase its take rate, thus monetizing its GMV at a higher rate.
BABA’s Take Rate Shooting Higher
In retrospect, the same argument applied to Facebook Inc (FB) shortly after its IPO, and was a big part of the bear thesis. Some would argue that Facebook’s active user upside was limited, or that it could even lose users over time. Despite decelerated user growth being a reality, Facebook’s growth is better than ever thanks to rising revenue per user (ARPU) figures across its platform.
With that said, Alibaba’s take rate is quickly and consistently rising. During this most recent quarter, BABA’s take rate was 2.98%, up from 2.42% and 2.33% over the previous two quarters, respectively. On a year-over-year basis, BABA’s take rate rose 10% from the same period last year, thereby driving a significant amount of Alibaba’s 32% revenue growth.
That said, GMV growth is clearly decelerating, and while that’s bad news for Alibaba, fact is that BABA can continue to thrive so long as its business partners are willing to pay more for placement and advertising.
With Alibaba controlling the e-commerce market in China, I think it is very likely that BABA will be able to increase its take rate over time.
Something to Consider
It is not uncommon for companies like BABA to prioritize user growth over monetization in its infancy. Up until this point, Alibaba’s priority has been to capture as much market share as possible, because it is easier to create revenue from one billion users than it is from 300 million. If you don’t believe me, just look at Twitter Inc (TWTR) versus Facebook.
Nevertheless, GMV growth may be slowing in China, but in retrospect, that may be good for BABA stock. Now the company can focus its energy on growing revenue and profits, figuring ways to better target consumers and drive its take rate higher.
Much like Amazon.com, Inc. (AMZN), BABA collects data on its shoppers, and also from all of its side businesses like payments, media, mobile operating systems, etc. This fact makes Alibaba a very attractive business partner, and highly capable of creating better revenue creating products.
With BABA stock trading at about 30 times free cash flow, cheap for a company with 30% growth, investors may not want to put so much stock in the idea that slowing GMV growth is a negative for Alibaba.
More than likely, BABA will be just fine.
As of this writing, Brian Nichols owns stock in BABA and TWTR.
