Alibaba Caps $250 Billion Rally With Accelerating Growth
Even after adding $250 billion in market value, Alibaba Group Holding Ltd. still manages to surprise.
Source: Lulu Yilun Chen
China’s biggest company raised its outlook for full-year revenue growth after reporting its fastest pace of sales since its record 2014 IPO -- an indicator of strong Chinese consumer spending. That comes as the e-commerce company’s shares have doubled this year, a rally that created more value for any company apart from Apple Inc.
With sales growth of 61 percent for the September quarter, billionaire Chairman Jack Ma is now pushing deeper into shaking up China’s 4 trillion yuan ($605 billion) old-school retail sector. Alibaba is enlisting half a million mom-and-pop shops as part of a drive to woo customers both online and in-store as it opens its wallet to boost services to merchants on its platform. That’s on top of a $30 billion spending plan for everything from artificial intelligence and cloud computing to logistics.
“They have multiple drivers of growth though, namely core e-commerce, impressive international expansion and cloud business,” said James Cordwell, a London-based analyst at Atlantic Equities LLP. “It will become more difficult for Alibaba to sustain this kind of growth, which is dependent on a Chinese economy that has been very strong.”
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E-commerce continues to be the key driver for Alibaba’s growth with rising sales on Tmall, the platform for businesses selling to consumers, and Taobao, where individuals sell to each other. Still, even as core commerce sales rose 63 percent for the quarter, the company is investing in new businesses.
Cloud computing revenue doubled, cementing its place as one of Alibaba’s fastest-growing businesses, in direct competition with Amazon.com Inc. and Tencent Holdings Ltd. Alibaba’s “new retail” plan carries a simple premise -- to combine its online merchants with a vast swathe of physical stores now divorced from the internet, stripping out layers of profit-sipping middlemen and boosting Alibaba’s e-commerce in the process. Those outlets double as storage and delivery centers.
Bloomberg Gadfly columnist Tim Culpan discusses Alibaba Group’s financial results. His opinions are his own.
But the execution involves a battery of expensive and time-consuming investments: buying into department stores such as Intime, setting up “smart” grocery stores like Hema, investing $15 billion into expanding its delivery network into remote regions, and enlisting some half-a-million mom-and-pop stores that now serve the countryside.
Alibaba is trying to transform the way retailers large and small manage their inventory based on real-time demand. And drawing more physical customers into its network boosts its own online orders and provides abundant data to target future consumers.
Early results are promising. Chief Financial Officer Maggie Wu said revenue from new retail -- mainly Hema and Intime for now -- more than quintupled in the September quarter. Efforts to integrate Cainiao, the loss-making logistics arm that it acquired, are proceeding apace. That gave Alibaba the confidence to predict a 49 to 53 percent rise in revenue in the current fiscal year, from 45 to 49 percent previously.
“We are seeing the early results from our efforts to integrate online and offline
with our New Retail strategy,” Chief Executive Officer Daniel Zhang said in a statement. He said the company plans to franchise the Hema model that combines a supermarket, restaurant and fulfillment center in a single location on its technology platform.
Mark Mahaney, an analyst at RBC Capital Markets, raised his price target for the stock after the results to $220. That’s up from $185 and 19 percent above Thursday’s closing price. He wrote in a research note that the results show Alibaba is the best way to invest in China’s economic growth and the secular growth of commerce online.
A big test of Alibaba’s nascent offline store network will come next week, when it holds its annual Singles’ Day promotion, the biggest shopping event on the calendar. Last year, transactions on its platforms reached 120.7 billion yuan, dwarfing U.S. promotions Black Friday and Cyber Monday. This year, 100,000 physical stores will also take part.
Ultimately, the idea is to sustain growth -- no small feat for a $480 billion company. Sales for the September quarter were 55.1 billion yuan, surpassing the 52 billion-yuan projected by analysts. Adjusted earnings-per-share were 8.57 yuan compared with the 6.90 yuan average of estimates. Alibaba shares were little changed in New York trading.
Core commerce, which remains by far the largest slice of Alibaba’s business, surged to 46.5 billion yuan, buoyed by 488 million active consumers on its Chinese retail marketplaces. A lot of that growth stemmed from spending via smartphones, as mobile monthly active users reached 549 million.
“Alibaba is doing really well in advertisement monetization, in that sense it’s more like a media company than an e-commerce company,” Steven Zhu, a Shanghai-based analyst at consultancy Pacific Epoch, said before the release. “The company’s ability to make money from its mobile app has improved significantly.”