Alibaba FQ3 17 – Crossed swords.

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Where Alibaba crosses swords with its peers, life is much tougher. 

• Alibaba reported excellent FQ3 17 results as growth in the other areas of its business augmented the Chinese retail juggernaut.
• FQ3 16 revenues / Adj-EPS was RMB53.2bn (US$7.7bn) / RMB9.02 compared to consensus estimates of RMB50.1bn / RMB7.70.
• Alibaba also raised its revenue forecast for FY17E from 48% YoY growth to 53% YoY as wholsale and international e-commerce, AliCloud, Digital Media and its ecosystem businesses are all growing much faster than the corporate average.
• Where Alibaba is effectively, unopposed things are going extremely well with both revenue and margin growth.
• This was the source of the better than expected profitability during the quarter just ended.
• However, where there is competition, Alibaba is having to fight hard to establish its position.
• This is particularly the case in Digital Media where it is fighting tooth and nail with both Baidu and Tencent.
• In FQ3 17, Digital Media revenues grew by 14% QoQ (273% YoY) but losses increased to 60% of sales from 39% in FQ2 17.
• This indicates that where Alibaba crosses swords with the other two BATmen (see here) things get tough.
• At the moment, everything is good as the areas where Alibaba is dominant are still growing nicely but when these slow it will have to begin competing much more aggressively with its Chinese peers.
• Consequently, the medium term outlook is for slower revenue growth and much stiffer competition.
• I see Alibaba as the most advanced of the three BATmen when it comes to expanding overseas but this is a long term strategy and unlikely to produce real revenues before things get tougher at home.
• When it comes to the ecosystem, I see Alibaba as the weakest player as:
  • First: Tencent is by far the strongest when it comes to Digital Life coverage and dominance.
  • Second: Baidu has by far the best understanding of what it takes to create a thriving ecosystem and is also streets ahead when it comes to artificial intelligence.
• This, and valuation is why I continue to prefer both Baidu and Tencent over Alibaba in the medium term from an investment perspective.