Despite Growing Uncertainty Around US-China Relations, Alibaba is Poised for Continued Growth

Summary:

• With the trend of deglobalization. Alibaba (NYSE: BABA) is a rare and resilient business that is supported by over one fifth of the world population from one single country.
• Alibaba beats estimates as the pandemic boosted online and cloud businesses.
• With the ability to expand business in a region with cultural fit and large unexploited customers, competition from global peers is not yet a valid concern.

With sales and net income increased by 34% and 28% from a year ago, respectively, and a non-GAAP EPADS of $2.10 vs $1.96 consensus, Alibaba (NYSE: BABA) reported another strong quarter. In particular, its cloud computing segment continued its trend with a 59% year over year growth.

It is not a surprise at all to see a positive earnings surprise for Alibaba — not only because it has been beating its earnings for a consecutive five quarters with an average of over 20% positive surprise, but also because of, in my opinion, its unique, resilient business profile.

When looking at a business in an environment of deglobalization, it is critical to look at where its revenue is being generated. Though traded in New York and Hong Kong, Alibaba at its core is still a highly Chinese centric business with 93% (FY2020) of its revenue coming from mainland China. Given the current tension between Trump administration and Chinese companies, this is actually a good thing because it makes Alibaba almost immune from possible future ban on Chinese companies’ oversea activities. This also in large explains why its stock price rebounded after Trump’s August 6 TikTok threat, as compared to its peer Tencent (OTCMKTS: TCEHY), whose WeChat is under high possibility of being banned in many ways. Another area to consider when adding a less globalized company to our portfolio is how resilient the underlying business is. Among other sectors, online retail is the one got boosted the most due to the global digitalization under COVID-19 pandemic. Regardless of how digitalized or how innovative it might seem, it is still a retail business and is driven by consumer spending power, or put simply, income. Apparently, with China being the first to enter and exit the pandemic, its consumer activities should get back to normal sooner and provide stronger support to domestic retailing. In an unstable geopolitical environment, it is rare to find a fast-growing business whose core revenue is almost not affected by unexpected tensions.

There are concerns over competition coming from both global e-commerce peers like Amazon or e-Bay and local competitors like JD.com (NASDAQ: JD) or Pinduoduo (NASDAQ: PDD). The reality is, with Lazada, Alibaba is taking the leadership of the fast-growing Southeast Asia market, which is its strategic focus for globalization. Domestically, Alibaba provides a complete digital ecosystem by offering not only retail platform but also payment technologies, delivery services, media and entertainment. In addition, the large population from mainland China and the digitalization of all aspects of people’s life provide friendly environment for most businesses and should help investors get over the concern, at least for the next several years to come. This is true for not only its core commerce business but also its cloud computing segment.

On Alibaba’s commerce platforms, 726 million annual active users (as of March 2020, latest 742mn) are accounted for 85% and 40% of Chinese population in developed and less developed areas, respectively. This number increased by 11% from a year ago and among the increase, 70% were from less developed area.

Table 1. Alibaba annual active users, gross merchandise value and spending per active user 2016–2020

As e-commerce is inevitably integrating with people’s everyday life, the continued penetration into all types of consumers brings not only convenience but also an interactive entertainment channel. Both TMALL and Taobao (two major Alibaba e-commerce platforms) provide live chats with the sellers, 24-hour livestreaming sales channel, which are very rare for other global peers like Amazon (NASDAQ: AMZN) or e-Bay (NASDAQ: EBAY). Those down-to-earth formats are adored by millions of consumers and bring extra colors to online retail in addition to providing basic functionalities. It’s almost like going into a farmer’s market on a weekend morning and interact with different sellers to find the best tomato for breakfast shakshuka.

Moving on to Alibaba’s Cloud Computing segment, in terms of absolute revenue, it is not yet as large as that of Amazon, Microsoft (NASDAQ: MSFT) or Google (NASDAQ: GOOG), but let’s not forget that Chinese market is only 1/8 the size of US. hence its growth potential is tremendous. Just like it is hard to compete with Azure and AWS in America and Europe, being local in mainland China provides huge advantage for Alibaba, who can leverage on its far reach and growing demand and keep this trend (table below) as a support for its already strong revenue stream.

Table 2. Cloud computing leaders

Maintaining business in any foreign country requires customizing solutions to fit local culture and value standard. If it does not go along with the company’s value system, then it’s reasonable to stay out of the market (A good example would be Google not entering China). On the brighter side, this also means that if a company can focus on a region with huge potential and aligned culture and value systems, it can maintain and grow a resilient business with less efforts and monetize from its operation more easily. This is clearly the case for Alibaba: with almost half of Chinese population as acquirable customers, it can enjoy high growth without concern over current difficulties of global expansion.