Alibaba (NYSE:BABA) has continued to report much higher revenue growth than its chief rival JD (NASDAQ:JD). This has increased Alibaba’s slice of the Chinese e-commerce pie.
Faster growth and higher market share should improve the bullish sentiment for Alibaba stock in the next few quarters.
A recent report from eMarketer shows healthy e-commerce sales in China over the next few years. This will give Alibaba a long growth runway. We could also see improvement in margins from Alibaba’s core commerce segment as it gains greater pricing power. Higher profits from core commerce have allowed BABA to successfully diversify into other segments which will improve its moat and give greater growth potential in the future.
Difference in Growth for BABA Stock
JD is the main e-commerce rival of Alibaba in China.
However, it has not delivered good revenue growth for the past few quarters. JD’s growth rate has fallen from the 40’s to below 20. This is a massive decline for a company that is in a rapidly growing ecommerce market.
Fig: Difference in revenue and FCF growth of Alibaba and JD in the last few quarters
It should be noted that Alibaba’s gross merchandise volume is much higher than JD’s. Hence, despite the large base effect, it is able to show faster growth.
Fig: Almost all the segments of Alibaba’s core commerce business have reported growth rate above JD’s overall growth rate of 23% in RMB. Source: Alibaba filings
This shows a fundamental trend where Alibaba is able to grab greater sales from JD and also increase its own market share.
Diversifying Revenue Base Will Boost Alibaba Stock
The highly profitable core commerce business has allowed Alibaba to diversify into other business segments. The cloud segment is still in the red, but BABA stock has been able to fund massive investments in this segment through its cash flow from core commerce. Alibaba has also reported faster growth in its New Retail strategy where it has opened new stores. There has also been big investments in the Digital media segment which improves the loyalty towards its ecosystem.
JD has not been able to diversify its revenue base at the same pace because of smaller margins.
Diversification also helps in giving a big boost to the valuation of Alibaba stock. Although its cloud has negative margin, it still adds huge value to Alibaba stock. Last year, Barron’s reported that Alibaba cloud could have a standalone valuation of more than $80 billion.
The Alibaba cloud had revenue of $1.1 billion in the latest quarter with a revenue growth rate of 66%. This is much higher than the 37% growth rate in Amazon’s (NASDAQ:AMZN) AWS. Future growth in Alibaba cloud should provide this business good economies of scale, which will help in increasing the margins and closing the gap with AWS.
Future Growth Trends
There has been a lot of discussion regarding the saturation of e-commerce sales in near term. A recent eMarketer report shows that e-commerce will continue to grab a greater share of retail sales in China. The e-commerce sales growth by 2023 is estimated to be close to 20%. This shows that Alibaba still has a decent growth path within its main core commerce segment.
Source: eMarketer
As the growth rate in core commerce declines, we should see other segments become the main growth driver. This includes New Retail, cloud, international commerce, and Ele.me.
Alibaba is trading at close to 25 times its forward price-to-earnings ratio. This is quite cheap for a company growing at more than 40%. Improvements in margins of cloud segments should further improve the EPS potential of the company. The improving market share in core commerce, diversification of revenue base, modest valuation, and future growth drivers are a strong bullish factor for Alibaba stock.
Investor Takeaway
Alibaba has shown faster growth rate than JD.com, its chief e-commerce rival. This has led to a higher market share of Alibaba in the core commerce segment. Alibaba’s management has also used higher cash flows from core commerce to rapidly expand other segments like cloud, New Retail, international retail, Ele.me and others. This should help in increasing the moat and improve the bullish sentiment towards Alibaba stock.
As of this writing, Rohit Chhatwal did not hold a position in any of the aforementioned securities.
