By 2036, Alibaba Group Holding Ltd (NYSE:BABA) expects to have 2 billion active consumers. Today, in China alone, there are 454 million and ex-China 83 million. This is just the beginning for BABA stock.
In three years time, BABA looks to do $1 trillion in GMV. BABA did 547 billion in 2017, 4.9% of China’s Total GDP. The scale is staggering, but even more staggering is the remaining growth opportunities that Alibaba has its eye on.
From internal changes to optimize the ad business, to its stays in Ant Financial, its cloud business and its foray into supermarkets, BABA stock is more than ever a force to be reckoned with and can be owned at a fair multiple. Here you have it, great business at a fair price.
Amazon/WFM Deal Is Nothing New
First a note on grocery, since that continues to be a hot topic on investors’ minds. Alibaba has already organically launched its own plugged-in supermarkets, called Hema.
Revenue comes from all directions, supported by seamless technology. Shoppers can purchase items in-store, eat in-store (seafood can be cooked in-store, immediately after selection, in keeping with local Chinese traditions), or just swing by to pick-up a pre-submitted shopping cart in-store.
Thus, BABA is already accomplishing what Amazon.com, Inc. (NASDAQ:AMZN) hopes to with Whole Foods Market, Inc. (NASDAQ:WFM). Hema stores are at once online and offline. Everything in the store being tech-enabled, and the store itself, by virtue being a brick-and-mortar asset, serves as a fulfillment center.
As I understand, these stores have meaningfully higher sales per square foot than the traditional supermarket. As you scan items while walking down grocery aisles, its app will recommend similar products. And then payments can all be processed through Alipay. From flash to bang, Alibaba owns the consumer.
While Alibaba’s efforts in ad personalization are still in the nascent stages. But given an extensive mine of user profiles, browsing histories, transaction histories and a highly engaged group of users, BABA will soon give competitors a run for their money.
It’s been about a year since Jack Ma & Co. started a more targeted ad initiative, and click-through rates have risen, which will boost revenues that are already growing like a weed as is. Management issued full-year fiscal 2018 revenue growth guidance of 45-49%.Enviable growth numbers.
Currently, smaller merchants make the majority of BABA stock revenue. Estimates of Alibaba’s revenue from large brands come in at well under 10%. Uni-Marketing” is the solution — an ad-buying platform designed specifically to meet the needs of said large brands. This platform was launched earlier in the summer and will help Alibaba gain share with bigger companies with more to spend.
A final point on advertising is ad load (number of ads shown per page of content). In short, higher ad load logically leads to higher revenue. There is much room to increase on Taobao alone, which will result in better monetization.
It’s an important optimization question that Facebook Inc (NASDAQ:FB) and Alphabet Inc (NASDAQ:GOOGL) wrangle with regularly, as more ads slow the webpage load time, negatively affecting user experience. Compressing the ads has mitigated this.
BABA’s Capital Allocation Plan
I came away from the Investor Day most impressed by the short but critical M&A portion. The focus on people and innovation and how that plays into the broader, ever more complex BABA stock chessboard will be the key to driving its global dominance.
The strategic thinking is very thorough with each deal having to do some combination of the following: improve the customer experience, increase users, expand geographic footprint and provide new retail opportunities.
Strategic investments over the past two years totaled $21 billion. A snapshot of the minority investments looks like the portfolio of a China focused VC, if lucky. Weibo, Didi (the rival that Uber succumbed to in China) and Meituan all make the list. The foresight as it applies to the next generation of Chinese tech businesses and extremely targeted strategy make for a lethal combination.
As of this writing, Luce Emerson did not hold a position in any of the aforementioned securities.