Most writers approaching Alibaba (NYSE:BABA) stock over the past week are going to be writing about Singles Day. That’s the the Nov. 11 shopping holiday former CEO Jack Ma created out of whole cloth a decade ago.
There’s a bigger story.
That story starts with Alibaba’s second-quarter report, issued Nov. 1. It showed that in the three months ending in September, Alibaba had earnings of $3.85 per share fully diluted, on revenue of $16.7 billion.
For every dollar that went into Alibaba, 60 cents stayed on the net income line. Alibaba is the most profitable company in the world.
What’s more amazing is that 82.5% of this money came from its “core commerce” operations. Only 6.6% comes from its cloud, slightly more from digital media like TV streaming. Alibaba is getting 60% margins on what’s essentially retailing.
How Alibaba Does It
Alibaba does this by controlling the channel from production to final sale. Since its founding in 1999 as a wholesale market, Alibaba has been in the business of connecting producers with buyers.
Unlike Walmart (NYSE:WMT), which buys in bulk from manufacturers then sells direct through stores, Alibaba doesn’t take inventory risk. That’s also what Amazon.com (NASDAQ:AMZN) does for third party sellers on its platform. The difference is that while most of Amazon’s third parties are wholesalers, Alibaba’s are producers. This means its share of the final margin is even bigger, relative to its costs.
The quarter represented 40% more revenue than the previous year, but even now Alibaba is just 13% of Walmart’s size. Despite this, Alibaba represent an enormous threat, because it’s taking over channels, starting at the manufacturing level, that Walmart depends upon.
This isn’t just happening in China. Thanks to Alibaba Cloud, Alibaba applications are being embedded at manufacturers across Southeast Asia. Its cloud isn’t like Amazon, providing raw infrastructure. Nor is it like Microsoft (NASDAQ:MSFT), providing a platform. Its applications are more comparable to Salesforce.com (NYSE:CRM). Its margins, and market control, can thus be much greater.
Alibaba is already big enough that U.S. payment processors call a halt to updates around Singles Day, to make sure systems can handle the load. Alibaba also had Taylor Swift headline a free concert in conjunction with Singles Day. (Her album Lover is as big in China as it is here.) Alibaba had sales of $30 billion last Singles Day, nearly double its last quarter take, and this year it broke that record.
Can anything stop Alibaba, or even hope to contain it?
The Two Choice Lawsuit
There is one thing, a lawsuit now going forward in Beijing, where Alibaba’s biggest competitors accuse it of anti-trust violations. It’s called the “two choice one” dispute in English. It means Alibaba is trying to keep competitors from using its online Tmall, and software.
If Alibaba is allowed to make itself the sole online channel for goods, companies like Pinduoduo (NASDAQ:PDD) and JD.Com (NASDAQ:JD) say they can’t compete. Alibaba calls what it’s doing a normal market practice.
The Bottom Line for BABA Stock
China’s government insists it has a monopoly of political and social power. But that doesn’t mean it’s going to allow private business monopolies.
If the government rules that rivals must be allowed to integrate with its online services, Alibaba’s local margins could suffer.
But this could also make Alibaba even stronger globally. Imagine a company that lets rivals allow access to its data, but still controls the underlying market. Losing the suit could make Alibaba an even more formidable competitor to Amazon than it is today. They’d both be on the same legal plane, but Alibaba would control the sources of merchandise.
Dana Blankenhorn is a financial and technology journalist. He is the author of the environmental story, Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN, BABA, and MSFT.
