Alibaba FQ4 15A – Ecosystem investor

Reply to this post

E-commerce powerhouse fuels ecosystem investments.

• Alibaba reported good FQ4 15A results but sent the clear message that would be ramping up investments in its fledgling ecosystem.
• FQ4 15A revenues / EBIT were RMB24.2bn / RMB5.1bn nicely ahead of consensus at RMB23.6bn / RMB4.6bn.
• Its Chinese e-commerce platforms Tmall (B2C) and Taobao (C2C) grew 41% YoY while GMV grew by 24% YoY highlighting Alibaba’s increasing ability to monetise the transactions that run across its platforms.
• Alicloud also fared well accelerating to 175% YoY passing 500,000 customers, somewhat mimicking the dynamics experienced by Amazon (see here).
• Increasing scale allowed margins to come in better than expected resulting in the strong EBIT performance exhibited.
• However, Alibaba was at pains to highlight its strategy which is to invest heavily and build a thriving ecosystem from two areas.
  • First. To capitalise on the user to user social interaction that is drives the transactions on Taobao and to encourage users to do more than just buy products on its platform.
  • Alibaba has begun this by encouraging greater interaction between users and to use the platform for the delivery of content such as photos, videos and live streaming.
  • Second. Alibaba has investments in media consumption (YouKou Tudou), Browsing (UCWeb), Navigation (AutoNavi), Gaming (9Game.com), Payments (AliPay) and Search (sm.cn) giving it many of the components needed for an ecosystem.
  • Now comes the tricky part of sticking all of this together in an easy and fun to use way such that its 423m active buyers on mobile become more engaged with the other activities they do on their devices.
• Both of these require significant investments and Alibaba stressed multiple times that these businesses could be loss making, bringing down the corporate average, for several years before any real results are seen.
• To help the short-term minded market, Alibaba has promised to improve its disclosure (slightly like Alphabet) such that it one can see the core business profitability and how much of that is then being invested in the new businesses.
• This is exactly the right strategy for Alibaba to pursue as economic growth in China is already slowing fast and soon the secular trend from a manufacturing economy to a consumption economy will also begin to slow.
• This will leave it slugging it out with Tencent, Baidu, Xiaomi and China Mobile for the hearts and minds of the Chinese smartphone users which is where most of its long term growth is likely to come from.
• Alibaba has fantastic cash flow giving it plenty of scope to make the investments it needs.
• It just remains to be seen whether Alibaba’s management that has been very e-commerce focused can successfully widen its remit and succeed in the much more diverse, difficult and competitive landscape it is now turning to address.
• On this hinge Alibaba’s long term growth and the performance of its shares.