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Alibaba Group Holding Ltd (NYSE:BABA) is aiming to hit $1 trillion GMV mark by 2020. Alibaba stock is still a good buy.
Last year was the best year for Alibaba Group Holding Ltd (NYSE:BABA) shareholders, world's largest eCommerce company by GMV, with Alibaba stock almost doubling last year. Now, one of the received wisdom is that stocks which have done very well in one period are likely to underperform in the consequent periods. However, investors must not hurry into abandoning their position in Alibaba stock just yet, for several reasons. While Alibaba stock may not deliver 2017 like returns in coming years, it is still likely to be a good performer as the company continues to deliver strong profitable growth
During its Investors day presentation last year, the Chinese eCommerce giant had positively surprised analysts and shareholders alike by guiding for significantly better than expected growth in the years to come. The company is now targeting $1 trillion GMV in Chinese eCommerce space by 2020, almost double the 2017 GMV. A success on this front could help Alibaba cross the $1 trillion dollars market cap (more than double the current size) milestone in the same time frame.
The trillion dollar question
The question now is whether the $1 trillion dollars GMV target achievable? To reach its goal, Alibaba Group Holding Ltd will need to grow its Chinese eCommerce GMV by a compounded annual growth rate of 22.7%. While this is a high target to achieve, given the company's past performance, Alibaba is most likely to pull it off. The company's GMV from China eCommerce retail has grown at a CAGR of 37% since FY 13, much higher than required growth.
While the size effect has potential to bring down the growth rate, the company has a significant room for error. Moreover, growth in the first two quarters of FY 18 has been better than expected and higher than the required CAGR. In the latest quarter, Tmall recorded 49% YOY growth in GMV. The strong performance of the Chinese economy and continued growth in retail eCommerce sales will be the main tailwinds for the company.
Consumption led growth to be a strong tailwind.
The Chinese economy is in the middle of a government-led transition from an investment led economy to consumption based economy. At 46 percent of GDP, China’s national savings are 26 percentage points higher than the global average. Higher savings mean lower immediate consumption. However, this scenario has already begun to change. Consumption accounted for as much as 64.5% of gross domestic product growth in the first nine months of 2017, which is 2.8 percentage points higher than the same period a year ago. Higher consumption expenditure will continue to drive retail demand.
Retail eCommerce sales in China continued to grow at a rapid pace in 2017 to over $1.3 billion. According to an eMarketer report, the eCommerce growth is likely to continue at a CAGR of 23.8% from 2017 till 2021 when eCommerce will account for 40.8% of all retail sales in China. Rising internet penetration and disposable incomes will play a key role in this growth. China is home to 751 million Internet users and more than 300 million middle-class consumers with rising disposable incomes.
Investing in its mobile platform.
eCommerce is also picking up in low-tier cities and rural areas as more and more consumers are using their smartphones to shop online. Smartphone penetration in China currently stands at 47%. This is likely to grow to 55% by 2020, making the role of mobile eCommerce more important. It is expected that by end of 2018, over $1 trillion worth of eCommerce transaction will happen on mobile. Alibaba is in a strong position to capitalize on this trend.
Alibaba has invested significant resources in its mobile platform. The company has over 500 million monthly active users on mobile and in 2017, mobile monetization rate came in at 3.04%, slightly above PC monetization rate of 2.97%. Consequently, mobile GMV grew by 79% YoY in 2017. Given the strength of its mobile platform, the company is likely to benefit more than others from the mobile shopping trend.
Stability of Chinese economy and competition are the biggest concern.
Despite several warnings from economists and analysts, Chinese economy continues to grow at a healthy pace. In the first three quarters, GDP growth has come in at 6.8%. In fact, for the first time since 2010, GDP growth is expected to accelerate. However, there are still concerns, especially in the property and the credit market. The debt-to-GDP ratio is heading towards more than 320 percent by 2022. The policymakers are already taking actions to deleverage the economy.
But there is a risk that too much tightening could lead to higher interest rates and credit defaults, significantly impacting the GDP growth figures. A fear of economic downturn had sent Alibaba stock crashing in 2015 and could do the same now. Then there is the threat of trade war with the U.S. Tensions have been soaring once again due to disagreement on North Korea. A slowdown or souring trade relation could impact Yuan which is not a good news for Alibaba investors. The current view, though, which is subscribed by World Bank and IMF, is that China can manage a soft landing of the economy without causing much harm to the economy.
Rising competition from JD.com (NASDAQ:JD) could also impact Alibaba's China eCommerce performance. According to a recent report, while Tmall remains the largest retail eCommerce platform, JD.com is catching up. While Tmall still controls over 51% of retail eCommerce transactions, JD.com has seen its share rise from 17.7% in 2014 to 32.9% in 2017. Moreover, JD.com now has access to deep pockets of Tencent (OTCMKTS:TCEHY) which is as big as Alibaba.
Alibaba Group Holding Ltd is all set for strong revenue growth.
Despite the concerns, in all likelihood, Chinese retail eCommerce will continue to post strong growth figures and hit the trillion dollar GMV mark by FY 2020. But it is not just the eCommerce business which is delivering strong growth for Alibaba. The company is firing on all cylinders. Alicloud revenue almost doubled from RMB 1.5 billion in the same quarter last year to almost RMB 3 billion the second quarter of FY 2018. Digital media and entertainment segment grew by 33%. And the company is making huge investments to keep the growth engine running.
Given the strong growth, there are analysts who feel Alibaba could hit the $1 trillion market cap by 2020. Analysts at MKM partners believe that Alibaba has best chances after Apple to hit this milestone. Though it is still a few years away from that point. Alibaba stock remains a good buy even now. Of course, the stock is likely to remain volatile given the massive short interest and the possibility of margin compression due to huge investment commitment.
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