The undervalued Chinese giant

Alibaba Group Holding is the largest and most successful e-commerce giants in China. Alibaba is often referred to as the Amazon of China due to the fact that over the last few years, the company has evolved from being a traditional e-commerce company to a conglomerate that has businesses ranging from logistics and food delivery to cloud computing.

Alibaba Group’s operations spread across three different business models, which significantly helps the company to dominate the entire Chinese ecommerce world – Alibaba.com, Taobao, and Tmall. This is one of the things that makes Alibaba unique as it covers the entire ecommerce spectrum ranging from consumer-to-consumer (C2C), business-to-consumer (B2C), and business-to-business (B2B) sales services via its web portals, as well as electronic payment services, shopping search engines and cloud computing services. Alibaba.com is the flagman of the company’s operations and it focuses exclusively on providing a direct B2B service. Taobao Marketplace facilitates consumer-to-consumer (C2C) retail by providing a platform for small businesses and individual entrepreneurs to open online stores that mainly cater to consumers in Chinese-speaking regions (Mainland China, Hong Kong, Macau and Taiwan) and abroad, which is made payable by online cellphone accounts. Its stores usually offer an express delivery-service to their clientele. Tmall on the other hand is a platform for local Chinese and international businesses to sell brand name goods to consumers in mainland China, Hong Kong, Macau and Taiwan. This puts Tmall in the B2C online retail category, which also closes the whole ecommerce circle for the company. It is important to note that businesses account for more than half of all online retail sales in China, which is one of the world’s fastest-growing e-commerce markets. Taobao is one of Alibaba Group’s most profitable marketplaces that generates for more than 80% of its sales, thanks to soaring demand for high-quality imported brands in China.

The senior management of the company has done a remarkable job in exploring the opportunity that this new environment has presented for the business. Despite the global pandemic, the company has experienced strong growth this year. Revenue grew 34% year over year in the fiscal first quarter ended June 30, up from the prior quarter’s 22% revenue growth. The COVID-19 pandemic has also resulted in an increase in user adoption of digital channels created opportunities for Alibaba. Due to the pandemic’s global supply chain disruption, international wholesalers turned to Alibaba.com to buy products, resulting in a year-over-year increase of more than 100% in daily active buyers in June.

Being one of the global leaders in E-commerce isn’t Alibaba’s only success story. Just like its US counterpart and major competitor, Amazon, Alibaba operates a cloud services business, which in turn saw Q1 revenue jumping 59% year over year. Furthermore, the top line for the Q2 by this segment was RMB14.9 billion (US$2.19 billion), up 60% from the year-ago quarter, driven by growth in revenues from customers in Internet, finance and retail industries. Seeing these impressive growth numbers for Alibaba’s 2nd most influential business segment is more easily justifiable as it is in a much earlier stage of development, thus it has more room to growth. Additionally, the cloud computing space is booming all around the world at the moment, thus for Alibaba to participate in this boom with the largest cloud service platform in China is a great advantage. However, what’s even more important is that the company’s leading business segment – Core Retail – has continued to grow with a remarkable rate of 25%+ across its various different categories. For example, China commerce retail business (accounting for 62% of total revenues) were RMB95.5 billion (US$14.1 billion), reflecting an increase of 26% year over year. Furthermore,the international commerce retail business (5% of total revenues) — Revenues for the quarter were RMB7.8 billion (US$1.1 billion), increasing 30% year over year.

The increase was driven by revenue growth from Lazada and Trendyol, partially offset by decrease in revenues from AliExpress. The international commerce wholesale business (2% of total revenues generated revenues of RMB3.5 billion (US$517 million), which increased 44% from the prior-year quarter etc.

Alibaba’s online sales continued to grow in the second quarter of fiscal 2021, backed by the shift in consumers shopping patterns amid the pandemic. In fact, the Mobile MAUs were 881 million, improving 12.2% from the prior-year quarter and 0.8% sequentially. Additionally, China’s retail marketplaces had 757 million annual active buyers, reflecting 9.2% year-over-year growth and 2% sequential improvement.

In fact, Alibaba possesses a number of unique strengths. These strengths give Alibaba plenty of room to grow even after an excellent financial performance this year amid the COVID-19 pandemic. Let’s look at why Alibaba is poised to become even bigger.

The current framework

As we all know 2020 has proven to be a very challenging year for many individuals and businesses as a result of the COVID-19 related lock-downs and economic shut-downs, which have quite honestly put the global economy on the ropes. The remarkable efforts of central bankers and politicians around the world for ensuring that the flow of liquidity in the market doesn’t stop and that people have everything they need to survive this difficult period, have also proven to be of essential importance for keeping the ball rolling. Multiple different and unprecedented monetary and fiscal measures have been taken in order to stimulate consumer spending, productivity and small-business operations as these are the most influential factors for the overall economic well-being of every nation. With shelter-in-place and social distancing orders going into effect many businesses have had to find a way of changing their core business model in order to stay relevant and functional. Others on the other hand, like Alibaba, have seen all of that as a great tailwind for their business operations in 2020. While the brick-and-mortar sector has experienced major store shut-downs, as people are not willing to risk their health by buying things physically from the store anymore, online sales on the other hand are seeing tremendous growth. We believe that the current meaningful shift towards online shopping is definitely here to stay as a concept. Even after COVID-19 goes away following the development of a vaccine, people will never go back entirely to how things were structured before the pandemic. COVID-19 will stay in history not only as the fastest spreading pandemic, but also with the world-changing effect that it had on the way people communicate, talk, eat, touch etc.

Share price performance

Alibaba’s stock has held up relatively well so far in 2020, gaining around 45% YTD and it currently presents an attractive combination of a strong fundamental positioning with a generally positive technical picture. One might say that this is nothing especially impressive, and one would be correct to do so if we were sitting in a rather normal market environment. However, this year has proven to be everything else but normal so far, as we saw tremendous volatility expansions both to the downside and to the upside in recent months. Some of the hardest hit sectors saw leading companies with tremendous track records, business models and general historical success like Boeing, General Electric, Walt Disney, Starbucks, Ford, Delta Airlines etc. lose anywhere between 50-70% of their market capitalization. In the meantime Alibaba, has shown a certain level of resilience and stability which definitely attracts a lot of investors attention. While the company is not immune to Covid-19, it had 2 impressive and financially strong Q1 and Q2 quarters. Alibaba Group Holding Limited reported second-quarter fiscal 2021 earnings of $2.65 per ADS, which surpassed the consensus estimate of $2.06. Furthermore, the bottom line increased 37% year over year.

We should also always remember that the scale on which Alibaba operates is impressive as it has 960 million active customers. Just to put that number in perspective, that’s roughly three times the entire population of the U.S. While Alibaba is often compared to Amazon (AMZN) because of the relatively close business models that the two companies share, we must acknowledge the fact that their growth numbers certainly aren’t similar. Amazon’s trailing 12-month revenue growth has been 209% in the past five years. Alibaba has more than double that growth rate at 460%. Yet AMZN stock is up 540% in that stretch compared to just a 350% gain for BABA stock. Let that sink in.

Major risks

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