The rise and rise of Alibaba

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The rise and rise of Alibaba
5 Mar 2015
For online sellers looking to sell their goods on international marketplaces, it can be tempting to head straight for Amazon, and that would be understandable; they’re a big name, and if they’re the only marketplace you’re familiar with, then why wouldn’t you go with them.
But I guess it doesn’t harm to know about one of the alternatives, and for those already aware of Alibaba, it’s interesting to know where they might be heading in 2015.
Alibaba are a massive Chinese e-commerce company, and they’re certainly on the rise. Analysts forecast that Alibaba’s revenue will rise by 43% to around CNY 103.5 billion (GBP 10.914 billion) in 2015. While this represents a slight slowdown against the 48% estimated sales increase in 2014, it’s still a huge increase year on year – if they get there.
So how do they come up with that estimate?
• More internet users - Alibaba believes that the internet penetration rate in China (the percentage of internet users in any country) could increase from 50% at the end of 2014 to 54% at the end of 2015. Add to that, a predicted increase in the share of internet users shopping online from 55%-60% to 60%-65%, and that’s a whole lot of potential right there.
• Mobile growth - The company expects to see rapid growth on its mobile platforms, and with good reason - during the last quarterly results, Alibaba’s mobile revenue grew by 1020% and the number of mobile monthly active users rose by 138.5% annually.
• International commerce - Alibaba has conservatively forecast that its international commerce revenues may rise by 20% in 2015. However, new acquisitions or other strategies may cause revenue to grow much faster than this estimate, which would result in higher revenue growth for the company.
As Alibaba looks to meet its targets, it is expected to press on with a number of key investments in 2015.
• International expansion – according to eMarketer, the worldwide business-to-consumer (B2C) e-commerce market is estimated to expand from $1.251 trillion in 2013 to $2.357 trillion by 2017. As global interest in Alibaba picks up, it is expected that they’ll leverage their strong brand recognition to command a higher share of the global e-commerce market. For example, Alibaba could set up a global version of its C2C marketplace Taobao to accelerate its push into international markets.
• Investment in other businesses – so far, Alibaba has invested in a number of technology businesses, from ShopRunner (an online retailer with free two-day shipping) to Tango (a messaging app), Lyft (ride sharing service) to Peel (TV remote app developer), and it looks like there’s more on the way. With more Alibaba fingers in more technology business pies in 2015, it’s thought that this will help fuel Alibaba’s long-term growth.
• The Cloud – It’s also expected that Alibaba will invest heavily in its cloud computing and data services business during 2015.
With all this investment, could margins decline?

In a word, yes. In slightly more words, commentators expect that a combination of a step up in Alibaba’s investment strategy together with high operating expenses will weigh on the company’s margins in the coming quarters. As it acquires new businesses, Alibaba’s operating expenses will remain high in the coming quarters, with increases in marketing and promotional activities, investments in cloud computing, the mobile platform, and other product development activities also keeping costs up.

In the quarter up to September 2014, Alibaba’s cost of revenue, product development, sales and marketing, and share-based compensation expenses as a percentage of revenue showed year-on-year increase of 5.9%, 4.6%, 4.4%, and 10% respectively. Don’t expect these expenses to tumble in 2015 – this is why Alibaba’s non-GAAP diluted earnings per share (EPS) in 2015 is forecast to be $3.16, against $2.27 (estimated) in 2014.

Are the prospects rosy?

We think so. However, while the long-term growth prospects for Alibaba look ve
Luke Trayfoot
0207 801 3022

Efficient Era
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