+26.58%
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BABA
Alibaba Group
Alibaba’s (NYSE:BABA) stock reacted negatively post the earnings release for the quarter ended June 30, 2015. This is as the company’s growth slowed down quite significantly during the period. In addition, the recent turmoil in the Chinese economy and stock market, along with increased competitive threats in the country’s e-commerce marketplace also caused additional concerns for investors. Notwithstanding these risks, we believe Alibaba’s long-term growth potential remains solid as the company could continue to account for a dominant share in the Chinese online retail market, which is expected to rise quite significantly over our forecast horizon. Additionally, Alibaba is also tapping growth opportunities in other parallel markets such as cloud computing, local commerce, and mobile Internet services, which could enhance its outlook in the long-run.
Revenue And GMV Growth Decelerated On The Platform
The quarter ended June 30, 2015 marked a significant period for Alibaba, as the top-line growth decelerated on the platform, leading to worries that growth could continue to slow down in the coming future. The GMV (gross merchandise value) transacted on its Chinese retail marketplaces rose by 34% in year-over-year terms. Excluding the impact of suspension in lottery business, GMV would have risen by 36% annually. This represents a slowdown as compared to the past few quarters, as GMV growth was seen at 49% and 40% over the past two quarters. Correspondingly, the overall revenue grew by 28% annually during the past quarter, as compared to 40% and 45% increase in Q4 2014 and Q1 2015, respectively. While there is an immense runaway ahead in the Chinese market, we believe revenue growth could continue to decelerate in year-over-year terms in the coming quarters, as a larger base will lead to difficult year-over-year comparisons.
Lower Monetization Rate Impacted Revenue Growth; However, Mobile Monetization Rate Is Picking Up
The overall monetization rate dropped by 19 basis points annually to 2.33% during the quarter. This was caused by increased share in the overall GMV of the mobile platform, which has lower monetization rates. In addition, there was a drop in PC monetization rates. However, the mobile monetization rate rose by 67 basis points annually and 43 basis points sequentially to 2.16% during the quarter. We believe this increase is encouraging, considering the mobile platform will continue to acquire a higher share of the overall GMV in the coming quarters. This also indicates that advertisers demand for mobile ads is increasing in the Chinese market. We expect mobile monetization rates to continue to improve going forward, and reach closer to desktop levels, as the mobile platform records higher user engagement and provides access to location-rich data.
Multiple Growth Levers For Alibaba’s Long-Term Growth
Even if Alibaba’s growth story seems to have lost some of its luster with this release, there continue to be multiple levers to its growth, in our view. Accordingly, we believe the company’s long-term outlook remains intact. Firstly, the company is prioritizing on mobile platform and logistics to hold on to its dominant market share in the Chinese e-commerce market. Its recent deal to acquire 19.99% stake in Suning (one of the largest consumer electronics retailers in China) is also aimed to enhance customer experience, through a reliable network of several hundred last-mile delivery and after-sales service stations. Further, Alibaba is tapping into the growing appetite for foreign goods among Chinese consumers, as well as for Chinese goods among international buyers, to strengthen its cross-border trade business.
Finally, Alibaba is eyeing growth opportunities in the cloud computing and online to offline (O2O) markets to maximize its long-term potential. We acknowledge that the recent slowdown in Chinese markets and increased competition from rivals such as JD.com create valid concerns among investors. Still, we believe the Chinese e-commerce market will continue to grow significantly over our forecast horizon. In addition, Alibaba’s dominant position in the market is here to stay and we don’t see a very significant drop in its market share over the coming years. At the same time, Alibaba will continue to invest in multiple growth opportunities, which will open up various new markets and revenue streams for the e-commerce behemoth in the future. All in all, we continue to remain bullish on the company’s future growth prospects.
We are in the process of revising our $99 price estimate for Alibaba’s stock.
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