This is a security that was on practically every conviction buy list from the Wall Street marketing machine. In fact, it still is, and even more so as the price loses steam each passing month. According to Yahoo!Finance, 16 brokers consider the equity a strong buy, 25 a buy, and only 4 a hold. It had almost the same recommendations three months ago when it was considerably higher.
Not everyone feels as positive about Alibaba as the sell-side analysts. Master of the Universe George Soros sold 98% of his holdings in Q2, leaving him with a meager 59,000 shares. Maybe this is a lesson for the retail investor to learn, that the majority of the time, IPO's should be left to the deep-pocket traders and hedge funds. The mom and pop investor usually gets fleeced by the time shares are available to the general public. Now we're back to square one, almost a year has passed, and the company is in transition. Let's see if you think this is a good place to park some money.
Some Background
Founded in 1999, Alibaba is the largest online and mobile commerce company in the world based on Gross Merchandise Volume [GMV]. GMV is generated from three marketplaces:
- Taobao: China's largest online shopping destination. It works a lot like Ebay. Alibaba provides the platform for merchants to set up digital storefronts, plus assists in logistics and payment processing.
- Tmall: China's largest third-party platform for brands and retailers. Some examples are American retailers like Costco and Macy's who are now setting up shop here for exposure in the People's Republic of China.
- Juhuasuan: China's most popular group buying marketplace.
| 2012 | 2013 | 2014 | 2015 | |
| Revenues in millions | $3,131 | $5,488 | $8,579 | $12,300 |
| Earnings per ADS | $0.26 | $0.57 | $1.63 | $1.57 |
As you can decipher, earnings per ADS have been lumpy on a year-to-year basis. However, with almost $400 billion GMV and growing, you can see why investors became excited at the chance to invest in such a solid company, especially when there is still a large untapped market in China. Although Q1 2016 wasn't bad, it wasn't up to Wall Street standards on the revenue front, which put additional pressure on the stock. Management took the foot off the gas in Q1 because of two transitions for Alibaba. One is the transition from desktop computing to mobile. The second is the overall transition of Alibaba from a platform to an Internet conglomerate much like Amazon (AMZN) or Google (GOOG).
Transitioning to Mobile
The overall consumer transition from desktop to mobile is a fairly old phenomenon now. It was only two years ago that Facebook (FB) shares were decimated because they didn't have a concrete mobile strategy, or at least this is what Wall Street thought. Alibaba's mobile strategy appears to be panning out, and this was a problem for the analysts because it decreased desktop growth. Alibaba management takes a different tack. They believe that both mobile and desktop are synergistic because the two platforms compliment each other. The company considers it a unified platform. Mobile users tend to visit Alibaba properties more frequently, but desktop users buy higher ticker items on a more "sticky" application.
In examining the last quarter more closely, mobile GMV reached $60 billion, an increase of 125% year-over-year. This accounted for 55% of total GMV transacted on Alibaba's marketplaces. The company expects mobile GMV as a percentage of total GMV to keep growing as they improve the user experience on their mobile apps. However, as a cautionary note, the company stated improvement in mobile monetization may not always be linear. Management also said that the strength in mobile commerce demonstrates Alibaba's ability to attract mobile users with strong commercial intent on a scale that is unrivaled by any peers in China, as well as globally.
Transitioning to a Technology Juggernaut
Rodney Dangerfield once said, "I found there was only one way to look thin: hang out with fat people.". This is exactly what Alibaba is doing, hanging with the fat technology giants like Amazon and Google. All three companies have expanded their core competencies to include other areas of interest that compliment their bread and butter technologies. For Amazon, it was morphing from an online upstart in e-commerce to cornering the market in cloud computing with Amazon Web Services. Google went from king of search to inventing the Android operating system, and developing robotics just to name a few areas of expertise. Now Alibaba has joined the fray with a big push into logistics and cloud computing.
In 2013, Alibaba formed a joint venture with Cainiao Logistics, taking a 48% equity interest in the operation. According to Alibaba, they have created the largest logistics ecosystem in China. Consumers now enjoy next-day delivery services in 41 major cities, including Beijing, Shanghai, Guangzhou, Shenzhen and Hangzhou, and this will be extended to 50 cities by the end of this year. Same-day delivery of groceries has also been launched in Beijing and Shanghai, taking a page right out of the Amazon playbook.
To buttress and expand Cainiao's logistics network, Alibaba recently formed a partnership with Suning, one of China's largest electronics and home appliance retailers. Now customers in over 150 cities will be able to enjoy two-hour delivery services. Alibaba has been handling approximately 30 million packages a day, 10 times the amount of their competitors, and those numbers just got larger with Suning in the fold. In addition, Suning has brick and mortal retail outlets to enable ease and efficiency in returning big ticket items.
Aliyun, Alibaba's cloud service, is the largest cloud computing business in China. Although the company has grand plans to take it global, I would think they would have difficulty going toe-to-toe with American counterparts such as Amazon Web Services and Microsoft's Azure. Nevertheless, after years of investment, Alibaba is beginning to see positive impact in reliable, cloud service offerings. In Q2, revenue growth from cloud services was 106% year-on-year, accelerating past the 82% growth in the prior quarter. Aliyun is one of the company's core growth strategies in the coming years.
Although Alibaba has its tentacles in many other businesses, according to the Q4 2015 conference call and the Q1 2016 conference call, logistics and cloud services are the areas the company is counting on to boost customer satisfaction and sales growth. However, make no doubt about it, Alibaba has plans to compete internationally with cross-border initiatives and other offerings. Exhibit A is Alipay, a service very similar to PayPal that accounts for about 78% of e-commerce transactions on the Alibaba platform.
Valuation
According to Yahoo! Finance, Price/Sales on a trailing twelve month basis is 14.5, which is high for a mature technology company. This is not an apples to apples comparison, but Amazon comes in at only 2.52, although doesn't produce earnings like Alibaba. In fact, Alibaba's earnings generation is a big selling point for investors. Wall Street is a forward looking mechanism, and we are already past Q1 of fiscal 2016 for the Chinese e-commerce behemoth. Earnings per ADS are projected to be $2.73 for the entire year. This would give us a P/E ratio of 25. Not overly exciting, but when you consider growth projections, the PEG Ratio looks much better. Next year, earnings growth is slated to come in at 27%, which would give us a PEG Ratio of just about one. That's in the wheelhouse of many traditional growth investors.
Caveats
One thing potential investors should not overlook is that Alibaba is a Chinese holding company registered in the Cayman Islands. I'm not suggesting they are going to fudge the numbers, any company has the potential to do that, but they may not have as much transparency as a domestic equity. They are also under the thumb of the People's Republic of China. Last quarter sales came up a bit short because Chinese authorities suspended Alibaba's on-line lottery. The government could interfere again in other areas.
For instance, in the 2015 Q4 conference call, an analyst brought up the point that the Ministry of Commerce recently proposed that all online merchants have to have their businesses registered and issued operating licenses. Alibaba management answered the question stating it was just a proposal, and that the government is encouraging entrepreneurs to modernize. However, Alibaba's Taobao Marketplace is a huge profit generator for the company, and any decrease in profits could place addition pressure on shares, albeit for a short period of time.
Finally, there is the issue of the September 19th share lockup expiration. Sixty three percent, or 1.58 billion ordinary shares may be flooding the market in about a month, if indeed the owners want to sell. Softbank, Yahoo!, company founder Jack Ma and Alibaba Executive Vice Chairman Joseph Tsai all have major stakes that could dilute company valuation metrics if they wish to liquidate. Not highly plausible, especially by company insiders, but could put a crimp in earnings per share if acted upon.
Conclusion
With the Chinese stock markets imploding, the Chinese economy contracting, global stock indexes like the DOW and S&P 500 correcting, there may be a better entry point in Alibaba. That said, this stock may be a good long-term investment for people looking for Asian exposure in their portfolios. Although Alibaba wants to expand globally, I believe that is a tall order, particularly with American rivals such as Google and Amazon which may be perceived to have the better technology. However, charity begins at home. There are over a billion people in China, and Alibaba has only 350 million monthly active customers. There's plenty of room for growth in the PRC, not to mention in the adjacent geographies in the Asia/Pacific region. I'd wait until after the lockup expiration before placing an order.