Success in the Smart Speaker Segment Makes Alibaba Stock a Buy

Alibaba (NYSE:BABA) is in a strong position to take advantage of the rapid acceptance of smart home devices in China. The company launched its smart speaker in mid-2017. Alibaba stock should benefit from the growth in smart home devices.

Success in the Smart Speaker Segment Makes Alibaba Stock a Buy

By the third quarter of last year, it was selling over 2 million smart speakers. Globally it was in third place behind Amazon (NASDAQ:AMZN) and Google (NASDAQ:GOOG), respectively.

During the Singles’ Day event, Alibaba further discounted the smart speaker to only $15 which further would have increased the demand for this product.

Alibaba is now looking to expand the presence of its voice assistant to different platforms, such as automobiles. Competitors Tencent (OTCMKTS:TCEHY) and Baidu (NASDAQ:BIDU) are also increasing their sales effort to improve their market share. This segment would be crucial for Alibaba stock. It can improve the traction of its e-commerce, advertising, and digital media business.

Smart Speakers Underestimated

Smart speakers can be thought of as a stepping stone to future smart home devices. They not only increase the consumption of music content but also increase new opportunities to attract customers to services like ecommerce, search queries, delivery and many more.

According to the last report by Strategy Analytics, Alibaba sold 2.2 million smart speakers in Q3 2018. This was up from a mere 0.1 million devices in Q3 2017.

Source: Strategy Analytics

This rapid growth shows the immense potential of the segment in China. During Singles’ Day, Alibaba’s smart speaker was marketed as one of the must-have devices for customers using any of its services with some success. A greater market share within smart speaker segment will improve the ecosystem and also help Alibaba stock. 

It is difficult to gauge the total addressable market at this point, but Alibaba is in a good position to attract a decent chunk of its 600 million customer base. Alibaba also is trying to increase the acceptance of its voice assistants in other platforms like automobiles and devices from other manufacturers.

By 2020, BMW cars will have Alibaba’s Tmall Genie voice assistant. Other carmakers might also follow this trend which increases market base for Alibaba.

Three Way Race

In most of the segments, China has seen a competition between Alibaba, Tencent, and Baidu. Almost all the new startups and services are linked to either of these three giants. The smart speaker and voice assistant segment will be no different. Both Baidu and Tencent are trying to improve their respective products by launching new features.

Tencent has recently added a digital assistant to its WeChat platform which is used by over 1 billion users in China. Rapid acceptance of this assistant can lead to increased demand for Tencent’s smart speakers. Baidu has already reported that over 100 million devices are using its DuerOS AI assistant, which is similar to Google’s.

Source: Canalys,

Growth in China’s market is also an important factor. The current market penetration is very low which is why most of these giants are looking at new ways to increase demand. After a blockbuster year in 2018, we should see strong sales growth in 2019 as more services are linked to these devices.

Both Alibaba and Tencent invested hundreds of millions of dollars in startups offering bike-sharing services. One of the main reasons for this investment was to improve the transactions on their respective payment platforms. Some of these bike-sharing services have now gone bankrupt.

However, this also shows that Alibaba is ready to make big bets to improve the growth potential of Alibaba stock. Smart speakers offer a much bigger scope of improving traction among customers. This should lead to a stronger focus and heavy investments to increase the market share by Alibaba, Tencent, and Baidu.

Alibaba could easily report sales in tens of millions in 2019. Another important factor within this segment is the transition to display devices from smart speakers.

Source: Strategy Analytics

Strategy Analytics has estimated that there will be a steady growth in smart displays as more tech giants push for this option. Alibaba has a very strong digital media segment and is planning to increase investment in Youku. It can very easily provide a combo option of subscribing to Youku and purchase of a smart display.

Smart Speakers and BABA Stock

Even if Alibaba ends up selling 20 million smart speakers this year, it would not move the top line by a significant level. It is heavily discounting this product with price ranging from $15 to $75. At an average selling price of $50, this would add over $1 billion in revenue for the company. The margins on this device will probably be negative due to rock bottom prices.

However, Alibaba stock would benefit in the long run as this segment has a strong loyalty effect. If a customer purchases a smart speaker from a particular brand, it is highly likely that the future smart home purchases will also be from the same company. 

As all the devices are interconnected, the best performance is achieved when they work in-sync with each other. Hence, a single smart speaker can open the doors to future purchases of smart displays and other smart home devices.

A much bigger impact will be felt on other segments like advertising, ecommerce and digital media. It binds the customers to Alibaba’s ecosystem and also provides the company with an option to advertise its new services. Alibaba will probably lay out a path to launching these devices in international regions like Indonesia also where it has a strong ecommerce business.

It should be noted that other companies will enter this segment. Apple already has announced its intention to start selling HomePod in China. It will be sold at RMB 2,799 or $408. This places the device in the luxury category. Other smartphone makers like Huawei and Xiaomi are also trying to increase the sales of these devices.

The Bottom Line on Alibaba Stock

Alibaba has shown rapid progress in selling smart speaker devices in 2018. We should see a continuation of this trend in 2019 as greater discounts are offered by tech giants to lure customers.

Alibaba stock benefits from the 700 million active customers on its ecommerce platform. It also boasts of a high customer base for its music and video streaming segment. This should help the company improve its value proposition for smart home devices.

We could see the company specifying the sales figure in the next few quarters as they become meaningful. Higher priced smart display devices and other smart home devices would also be an ideal target for Alibaba.

This segment has a long runway for growth and provides numerous advantages to Alibaba stock. 

As of this writing, Rohit Chhatwal held no positions in the aforementioned securities.

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