The social media video app TikTok is taking the U.S. by storm. Douyin, the Chinese version of the app, could be even bigger. In fact, it may end up a cash cow for Alibaba Group (NYSE: BABA) stock.
What Is Douyin?
TikTok was the single most downloaded app on the iOS platform in the U.S. in August. The short video clip platform’s app was downloaded 12.1 million times last month, more than Alphabet’s (NASDAQ:GOOGL,NASDAQ:GOOG) YouTube or Facebook’s (NASDAQ:FB) Instagram and WhatsApp. On the Android platform, TikTok generated another 36.6 million U.S. downloads, topped only by WhatsApp at 47.2 million.
TikTok may be the latest smash social media hit in the U.S., but it’s not new to China. In fact, TikTok parent company ByteDance is based in China and launched the original version of TikTok in China back in 2016. The app is called Douyin, and it has 320 million daily active users as of July, according to KeyBanc. That’s user count is roughly in-line with the entire population of the U.S. (327 million).
Douyin and BABA Stock
Last year, Douyin announced it was making a push to monetize its highly successful platform. One way of doing so would be by integrating external shopping links to its platform.
By adding tiny shopping cart logos to the Douyin user interface, users can connect directly to products listed on Alibaba’s Taobao and Tmall e-commerce platforms.
“[Douyin] can be strong weapon for e-commerce, especially for Alibaba Group and Tencent, which want to reach to younger consumers and those living in smaller cities,” Lu Zhenwang, CEO of Wanqing Consultancy, told the South China Morning Post last year.
The Numbers
KeyBanc analyst Hans Chung recently did a deep dive into how much Douyin could mean for BABA stock. Chung estimates the Chinese version of TikTok will generate more than $14 billion in incremental gross merchandise value per year for Alibaba stock. In a bull case scenario in which Douyin shopping takes off, that number could jump to $36.6 billion per year, Chung says.
KeyBanc estimates Alibaba Group already generated more than $2.1 billion in GMV from Douyin in 2018. In June, Alibaba implemented an additional 6% take rate in service fees charged on third-party transactions. Those new fees cover purchases made via Douyin.
Chung says the massive success of Douyin and the fact that its growth is still in the early stages could move the needle of Alibaba’s already gigantic numbers.
Based on his estimates of projected GMV and take rate, Chung says Douyin could generated an additional $718.7 million in annual revenue for BABA stock. On the earnings front, Douyin could be worth $577.8 million in annual EBITDA, or about 18 cents in EPS per Alibaba stock share. Based on KeyBanc’s fiscal 2019 EPS estimate for BABA of $5.72, Douyin could single-handedly boost EPS by more than 3%.
KeyBanc found that the number of fans of the top 100 “key opinion leaders” on Alibaba’s Taobao Live Streaming platform nearly doubled from March to August of this year. Chung says monetizing the meteoric rise in popularity of these KOL influencers in China represents a major opportunity for Alibaba.
“As content/KOL-driven models prevail in the consumer’s path to purchase and present higher conversion, we view BABA as the biggest beneficiary of this secular trend,” Chung says.
KeyBanc has an Overweight rating and $245 price target for BABA stock.
Takeaway
U.S. investors have used BABA stock as a means of short-selling China throughout the trade war. However, despite the trade war headwinds, Alibaba continues to report staggering growth numbers. Back in June, I suggested investors buy BABA stock on the trade war dip. Since that time, Alibaba reported June quarter revenue growth of 42%, and the stock is up roughly 20%.
I also predicted that Alibaba’s massive trove of short sellers would soon be facing a tough decision. If and when a trade deal is reached, BABA stock could skyrocket. In the month of August, BABA stock short sellers covered more than $1.2 billion of their short positions. In fact, BABA’s outstanding short position has dropped from more than $20 billion to just $3.3 billion since March.
China is scary these days for U.S. investors. But ultimately, the U.S. and China will reach a trade deal. The two nations each have too much to gain from a deal for the dispute to go on forever. Regardless, BABA stock keeps kicking out growth numbers that put all its U.S. tech counterparts to shame. Alibaba’s partnership with Douyin is just one of a long list of reasons BABA stock is the best play on the largest emerging market economy in the world.
As of this writing, Wayne Duggan was long BABA stock.
