Alibaba Q1 16A – Law of large numbers.

Reply to this post

Good growth but not good enough.

• Alibaba disappointed the market with its Q1 16A results as the slowdown in China has proven to be un-escapable.
• Q1 16A revenues / EPS were US$3.2bn / US$0.59 compared to estimates of $3.15bn / $0.58.
• Revenue grew a very healthy 28% YoY but this is half the average of the last 12 quarters and lower than the market was hoping for.
• It is obvious that both Alibaba’s revenues and the Chinese economy have reached a size where it is no longer possible to grow at such a break neck pace. (law of large numbers)
• Online shopping in some of the larger Chinese cities is already reaching saturation which is driving Alibaba to look for other areas of growth.
• One of these is O2O (online to offline) which is what the investment in Suning (see here) while another is mobile.
• The good news was that MaUs of its mobile commerce apps has already hit 307m (up 63% YoY).
• Furthermore transactions on mobile devices during Q1 16A had a gross merchandising volume (GMV) of $60bn which was 55% of the total.
• However revenues from mobile monetisation were US$1.26bn or 40% of the total indicating that Alibaba has more to do in terms of monetisation of transactions relative to those on the PC.
• This is also a great base from which Alibaba can expand e-commerce into Digital Life services.
• This is exactly what it appears to planning to do with its investment in Meizu (see here) and its proprietary fork of Android (YunOS).
• The potential rewards are significant as RFM estimates that Google will earn around $20bn in revenues from mobile devices in 2015E an area where Alibaba currently is generating very little.
• However in order to succeed it will have to create a suite of services that are fun and easy to use such that users continue to spend time in Alibaba’s properties even after they have finished their shopping.
• This is easier said than done but Alibaba has a great base from which to start as it already has over 300m users that are regularly engaging with its services.
• I suspect that there is still some froth still to come out of the Alibaba valuation as the Chinese economy continues to slow and expectations need to be reset.
• Long term this will be one to watch very closely for an entry point as I think it has real potential to be one of the leaders in China.