Alibaba (NYSE:BABA) has been boasting rapid growth in paying subscribers for its Youku platform. In the latest quarter, the company mentioned that Youku’s average paying subscribers grew 47% year-on-year. This helped Alibaba show 23% YoY growth in the Digital Media segment.
At the same time, there has been a narrowing of losses within the Digital Media segment. This trend should improve the bullish sentiment for Alibaba stock.
In the year-ago quarter, Alibaba reported 3.8 billion yuan EBITA losses for the Digital Media segment. In the recent quarter, this loss came down to 2.2 billion yuan, or $309 million.
There has also been an improvement in EBITA margin. It increased from negative 64% in the year-ago quarter to negative 30% in the latest quarter. At this pace, Alibaba should be able to break even in this segment in 2020. Digital Media is the biggest loss-making segment within Alibaba. Rapid reduction in losses in this segment should help in boosting the overall margins, EPS and improving the momentum for Alibaba stock.
Improvement in Digital Media Metrics
Alibaba’s online streaming platform, Youku, has reported 47% year-on-year growth in paying subscribers. This growth has also fueled the revenue growth of 23% within Digital Media segment. In the latest quarter, the revenue base in this segment increased to 7.3 billion yuan or $1.02 billion.
There has been a massive reduction in EBITA losses within the Digital Media segment. One of the main reasons is that the management is focusing more on return on investment and ensuring cost efficiencies. This has helped in reducing the quarterly losses from RMB 3.8 billion in the year-ago quarter to RMB 2.2 billion.
Advantage Over Rivals
There is a huge halo effect from the Digital Media segment. Higher user engagement on Youku helps Alibaba promote other services and monetize the customer base effectively. These new services are crucial for the future growth of Alibaba stock.
It should be noted that Alibaba’s main competitors, JD.com (NASDAQ:JD) and Pinduoduo (NASDAQ:PDD), will find it difficult to replicate the scale of Youku. Hence, Alibaba would be the only retailer with a very strong entertainment portfolio. This is similar to Amazon’s (NASDAQ: AMZN) position in U.S. where it is the only ecommerce player with heavy content investment.
Over 100 Million Paid Subscribers
Youku, iQiyi and Tencent Video are the three major players in the over-the-top (OTT) video market in China. Last year, eMarketer estimated that the market share for these three players was close to each other.
Alibaba does not break down Youku’s paying subscriber numbers. However, iQiyi reported that it has crossed 100 million mark in June 2019. Similarly, Tencent Video reported in the latest quarter that it has seen 22% year-on-year growth and has 100.2 million paying subscribers. Alibaba’s Youku has reported higher growth rate than Tencent Video in terms of paying subscribers. Hence, it is very likely that Youku has also crossed the 100 million mark or is very close to it. We should soon hear about the exact number of paying subscribers from the management which can provide another positive tailwind to Alibaba stock.
Youku’s 47% year-on-year growth is more impressive when we look at the already large base of paying subscribers. This shows the ability of Alibaba to create attractive content for its Chinese audience.
Pivotal Role in the Future
We can see in the Bloomberg chart that Alibaba has a double-digit market share in the user time spent on a platform. Youku is the primary reason behind Alibaba’s healthy market share in this metric. It is likely that Alibaba will keep on investing in this segment to gain more paying subscribers and increase customer engagement on its overall platform.
Youku also has an advantage due to its control over the content delivered on its platform. If the Chinese administration decides to further tighten up the social media regulations, it will be a challenge for Tencent and ByteDance, which have a large chunk of user-generated content. The big winner of this move will be Alibaba’s Youku. Alibaba stock has out-performed Tencent stock in 2019 and resolution of trade war should further improve the growth prospect of Alibaba stock in 2020.
Alibaba’s Digital Media segment continues to show rapid improvement in a number of important metrics. Youku has posted 47% YoY growth in paying subscribers, compared to 22% growth reported by Tencent Video. Youku should be close to 100 million mark in terms of paying subscribers and is one of the top three OTT players in China.
Alibaba has also mentioned about the massive decrease in losses in the Digital Media segment. Lower losses and good revenue growth should allow this segment to show positive EBITA by end of 2020. Youku also helps in increasing the overall user time spent on Alibaba’s platform. These users can be monetized using different services like retail, delivery, Alipay, and others.
As of this writing, Rohit Chhatwal did not hold a position in any of the aforementioned securities.