Fair value estimat: 90 USD
Investeringsanalyse, R. J. Hottovy, 11/06/2015
By operating some of the world’s largest online marketplaces, Alibaba benefits from a strong network effect in the rapidly growing e-commerce industry in China. The firm has played a prominent role in China’s structural transition to online shopping from brick-and-mortar retail the past decade. Alibaba’s three major marketplaces--Taobao, Tmall, and Juhuasuan--together generated gross merchandise volume, or GMV, of CNY 2.274 trillion ($361 billion) in calendar 2014, more than Amazon and eBay combined (more than $150 billion and $83 billion, respectively). As a third-party e-commerce platform operator, Alibaba allows millions of buyers and sellers to connect, explore, and transact with each other. The company boasted 334 million annual active buyers as of Dec. 30, 2014. As China’s e-commerce market rapidly shifts from C2C to B2C, we believe Taobao will be instrumental in helping Alibaba adapt to changes in China's e-commerce landscape. Taobao's dominant network effect enhances Alibaba's entire ecosystem, providing low-cost organic traffic for Tmall and other B2C marketplaces while reducing a reliance on a salesforce for marketing services, also providing Alibaba additional cost advantages. Alibaba's success with desktop transactions also gives the company key advantages over its competitors on the mobile end. Its trusted brand and self-reinforcing ecosystem convince us that the firm can copy its success to the mobile commerce market. Taobao's mobile app is already China's most popular mobile commerce app by user base. According to iResearch, Alibaba expanded its share of the mobile commerce market to 88% in the fourth quarter of 2014 from 83% in the same period in 2013.
We expect the firm to benefit from several macroeconomic, socioeconomic, and industry tailwinds. Continuous wealth creation and steady income growth among China's middle classes should enlarge the wallet share of users on Alibaba’s marketplaces. The relatively young user profile ensures the longevity of its network
effect, while further penetration of broadband and mobile devices will fuel user growth and increased monetization rates.
Bulls say
- Alibaba boasted 350 million active buyers as of March, representing more than 20% of China’s population. We expect a long runway of user growth in the coming years.
- We believe the company is well positioned to benefit from the structural shift from C2C to B2C in China’s e-commerce market, as Tmall can gain significant organic user traffic from Taobao and better monetize transactions.
- Almost 70% of Chinese online shoppers born in the 1990s consider Taobao as their first online shopping choice. Their loyalty and user habits indicate a lifetime of potential transactions.
Bears say
- Despite its dominance in China, we believe the road to overseas expansion will be a challenge for Alibaba due to the network effects of local ecommerce rivals in other regions.
- Rapid expansion of other e-commerce players like JD.com, Vipshop, and Amazon could limit the growth potential of Alibaba in some specific product categories.
- The firm has invested in some businesses that might not significantly improve its ecosystem. This could distract management or result in poor allocation of capital.
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