Alibaba FYQ1 16A – Monetisation magic

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Improving monetisation underpins mighty numbers. 

• Alibaba reported very strong FYQ1 16A results as a very good performance in e-commerce was enhanced even further by Alicloud and the investments Alibaba has made in the ecosystem.
• FYQ1 16A revenues / EBIT were RMB32.15bn / RMB8.8bn compared to consensus at RMB29.8bn / RMB8.5bn and RFM at RMB24.7bn / RMB7.4bn.
• The real key to the beat was the monetisation rate which jumped to 2.8% and where, for the first time, the rate earned from mobile users was the same as it was for fixed.
• RFM had been forecasting monetisation of 2.6% for fixed and 2.2% for mobile.
• This has been driven by improving the usage of user data to provide a more engaging and relevant shopping experience for users particularly on Taobao (C2C).
• This makes Alibaba increasingly the go to place to buy and sell products meaning that it can charge both buyers and sellers a little bit more for the service that it is providing.
• This combined with GMV of RMB837bn (up 24% YoY), 156% YoY growth in Alicloud and the inclusion of newly acquired Youku Tudou (video streaming) is what drove the excellent results.
• Alibaba maintained its outlook for 48% YoY revenue growth for the full year which now looks more achievable given how well it has progressed when it comes to monetisation.
• For example even if monetisation stays where it is now at 2.8% that will be enough to provide an extra 12-15% points of revenue growth for the full year 2016E.
• Furthermore, within Taobao Alibaba is beginning to show signs of doing more with the data that its users generate giving me greater confidence that it is beginning to think like an ecosystem.
• If this mindset spreads out across all of its properties and not just Taobao then Alibaba will be in a strong position to monetise its growing ecosystem much more effectively than it has to date.
• RFM research indicates that if this is fully implemented by 2018, then revenues, profits and cash flow could be around 45% higher than is currently forecast.
• Alibaba has a long way to go but there are some signs that the way it thinks about its business and its strategy is catching up with Baidu’s.
• That being said, the valuation of Alibaba still looks stretched.
• Corporate governance by the Alibaba Partnership remains far from ideal and as a result I am still deducting 20% from the fair value of Alibaba to compensate for the added risk assumed by minority shareholders.
• This combined with the recent rally in the share price still leaves me unenthused with the outlook for capital growth going forward.
• I continue to prefer Baidu, Microsoft and Samsung.