Alibaba FQ3 15A – Law of large numbers

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A slowdown at Alibaba is inevitable.

• Alibaba reported good FQ3 15A results but there are signs that the outlook going forward will be somewhat slower than the market would like.
• FQ3 15A revenues / Adj-EPS were RMB 35.5bn (US$5.3bn) / RMB 6.43 (US$ 0.99) comfortably ahead of consensus at RMB 33.0bn / RMB 5.84.
• Active buyers increased to 407m in China of which 393m are active on mobile devices on a monthly basis.
• Gross Merchandise Value (GMV) was RMB964bn up 23% YoY of which 65% was transacted via a mobile device up 30% 12 months ago.
• This was mainly driven by a combination of 10.5% retail growth in the Chinese economy and increasing online transactions which accounted for 12.9% of retail compared to 10.6% a year ago.
• Despite the indubitably excellent results, the focus remained on the fact that GMV is continuing to slow.
• 23% YoY growth this quarter has slowed from 34% 6 months ago and 49% in FQ3 14A.
• The sensitivity of this issue is clear as management’s answers to questions concerning GMV growth were weak and the slide that shows its progression has been removed from the normal results deck.
• GMV growth is also slowing because Alibaba has been cleaning house and removing businesses that deal in counterfeit goods and so on.
• However, the net result is that the Chinese economy is slowing and Alibaba will inevitably slow with it.
• This is exacerbated by the fact that Alibaba is now a very large company and large companies almost always grow more slowly than small ones.
• The other option is for Alibaba to grow internationally and while it is getting some traction from Chinese users buying goods from overseas, its appeal to non-Chinese users remains muted.
• Without a sudden break-through in international businesses growth is going to continue slowing in 2016.
• At the same time Alibaba is also investing in creating a digital ecosystem beyond e-commerce but it is still very early days.
• Its Digital Life portfolio remains quite limited, its Android software is not fully developed, and it has yet to really create a delightful and cohesive user experience on mobile.
• In the long-term there remain big opportunities ahead for Alibaba but, much like Facebook, it has a lot of work to do before it can expect to really monetise them.
• Despite this, compared to Amazon, I think Alibaba is faring well.
• It makes a good profits, its thinking around the ecosystem is far clearer and it is easy to see how the investments it makes further that ambition.
• Furthermore, its shares are far cheaper than those of Amazon making a choice between investing in these two not very difficult.
• Alibaba has a tough year ahead but the long-term outlook is for it to remain one of the Chinese giants.