Is Alibaba Group Holding Ltd China’s Premier Mobile Ad Play? (BABA)

The landscape of digital advertising in China is changing, with new leaders toppling old ones that were once thought to have a strong hold on their share of the market. Specifically, e-commerce giant Alibaba Group Holding Ltd (NYSE:BABA).

Is Alibaba Group Holding Ltd China's Premier Mobile Ad Play? (BABA)

This is largely thanks to the explosive growth of mobile advertising, which now generates more digital ad revenue than Baidu Inc (ADR) (NASDAQ:BIDU).

Don’t forget, Baidu has been referred to as the Google (NASDAQ:GOOG, NASDAQ:GOOGL) of China. That’s not to be taken lightly.

China’s Digital Advertising Shakeup

With just a quick glance, China’s digital marketing landscape doesn’t look that different now than it did a year ago. Chinese stocks Tencent Holdings Ltd (OTCMKTS:TCTZF), BIDU and Alibaba stock are still the dominant three names in the business. The three of them together control 60% of the online-advertising market for the nation state. That hasn’t changed between 2015 and 2016 so far.

There’s been a subtle, but tectonic shift among those three names, however. According to eMarketer, Alibaba’s digital ad revenue market share will grow from 24.8% in 2015 to 28.9% in 2016, at the expense of Baidu. The market share for BIDU is projected to shrink from 28% for 2015 to 21.3% this year. BABA’s lead on Baidu is expected to widen through 2018 as well.

An estimated $40 billion is at stake this year alone, although that figure is growing fast.

Multiple factors have contributed to this shift in leadership, not the least of which is a major regulatory overhaul of the country’s digital advertising rules. The prod for those changes began to materialize earlier this year, after a young man passed away from a rare joint cancer. He sought to explore all of his treatment options online, using Baidu as his search tool. He thought he found his best option, but it’s been recognized in the meantime that what he found was more of an ad than a reason for hope; the ad painted a more optimistic survival outlook than it should have.

The event sparked several changes in the way online ads work in China. Among other things, ads for prescription drugs and tobacco products are no longer allowed online. Government approval is now required for other healthcare advertising.

It’s a shift that takes the most wind out of Baidu’s sails.

The Same, But Different

New regulations may present a headwind for Baidu, but even without those restrictions the change in leadership may have been in the cards.

While China’s internet industry more or less looks the same as the United States, even American owners of Alibaba stock may not realize the extent to which differences between the two cultures lead to different hot spots.

Social media is one example. While Facebook Inc (NASDAQ:FB) and its social networking peers here in the U.S. hoard more than their fair share of digital ad revenue, in China, social media only accounts for 8% of the digital advertising market.

At the same time, as much as most American’s have their nose buried in the smartphones, usage of mobile devices is even greater in China. The average U.S. resident spends 45 hours per month on a smartphone, versus 49 hours per month in China. It sounds insignificant, but it matters. Last year, 71% of Chinese that were new to the internet accessed the web on a mobile device. Only 47% went online with a desktop or laptop. The disparity is still widening.

Chinese smartphone owners also “do” more with their mobile devices — from hailing a cab, shopping, banking, sending money, buying movie tickets, consumer media and more. All of that was popularized in China before the U.S. got a whiff.

Those differences favor Alibaba stock — which has made a point of investing on seemingly odd things like food delivery and selling movie tickets — over Baidu. BIDU has dug deep in its pockets to remain relevant in a mobile world, but has barely a return to show for it. Actually, it may have been spending on the wrong things.

Bottom Line for Alibaba Stock

Alibaba’s new place at the head of the class isn’t a reason in itself to own Alibaba stock over other Chinese stocks in the digital advertising space. It is, however, evidence that BABA is the kind of company that knows how to strike a chord with consumers, meeting them where they want, how they want.

Among the three big names in question (and despite the frothy valuation), it’s the only company that’s proven it can dynamically adapt to changes in consumer-influencing technology.

Tencent Holdings, through its popular messaging platform WeChat, is a respectable second in that regard. Tencent, however, looks like it’s becoming dangerously dependent on WeChat as a growth vehicle. It wouldn’t take much for fickle consumers to find another online multi-faceted chat tool they like, putting Tencent’s bread and butter at risk.

The good news for Tencent is, its biggest potential threat on the messaging front — Alibaba — failed to make a dent in this business when it unveiled Laiwang a while back, despite BABA CEO Jack Ma pressuring employees to sign up at least a 100 users or else no bonus.

As for Baidu, it’s difficult to get excited about it right now, but not because it’s not a major mobile player. Indeed, as of early this year, it controlled 91% of the mobile search market in China. That doesn’t leave it much room to grow, however, except in terms of sheer market size.

In the meantime, heavy spending continues to shrink net margins, and there’s no end in sight for this trend.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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