Alibaba FQ4 18 – Juggernaut momentum

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Another excellent year ahead.

• Alibaba reported excellent FQ4 18 results and guided very strongly for the year to come as its investments in offline retail begin to contribute to revenues.
• However, this does come at a cost as offline retail is unlikely to ever match the profitability of Alibaba’s online market places, meaning that margins will steadily decline as the empire expands its reach.
• The meteoric rise of Amazon, which rarely makes any money at all has clearly emboldened Alibaba to invest its margins for long-term revenue growth.
• FQ4 18 revenues / adj-EPS were RMB61.9bn (US$9.7bn) / RMB5.73 nicely ahead of consensus at RMB59.0bn / RMB5.50 but it was the guidance that contained the real surprise.
• Revenues in fiscal year to March 2019 are expected to grow by a massive 60% YoY, well ahead of consensus at 42% YoY.
• Part of this is due to the first-time consolidation of ele.me and Cainiao Logistics but even without these, YoY will still be 50%.
• Alibaba has been able to grow faster than I expected due to gaining share in e-commerce thanks to using its technology to create the best online shopping experience.
• The result is that Alibaba is more than ever the place to transact online in China meaning that it can increase the fee that it charges merchants for selling on its site without fear of losing market share.
• This is classic marketplace economics which Alibaba is exploiting to the full.
• This is clear from the guidance where the core business going to continue growing at a very rapid pace despite its very large size.
• When it comes to ecosystems in China it is rapidly becoming a two-horse race as Baidu appears to be backing away from being a complete ecosystem, choosing instead to focus on its core competences of AI and search.
• This leaves Alibaba and Tencent to slug it out for supremacy in the ecosystem, but also opens the door to the possibility for one of them to licence Baidu’s AI at some point.
• I suspect that this would be Tencent, as I see Alibaba as being somewhat ahead of Tencent in this area and certainly further ahead in understanding and making use of the data that it collects.
• The muted reaction of the share price to these excellent results is a sign that the valuation is assuming a lot more good news, but I am warming up to the fundamentals of this company and am looking for a good time to enter.