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Alibaba Invests Globally to Regain Glory

Posted on Wednesday, Mar 23rd 2016

Two years ago, Chinese e-commerce giant Alibaba (NYSE: BABA) went public at the biggest US IPO ever when it raised $21.8 billion at a valuation of $167.6 billion. Soon after, the stock continued to skyrocket and was soon trading at valuations north of $215 billion. Since then though, the company’s ride has been bumpy. Its stock price had fallen much below IPO levels last year before recovering this year. But now, Alibaba looks to be investing aggressively in market expansion, especially geographic.

Alibaba’s Financials

Alibaba’s revenues for the third quarter grew 32% over the year to RMB 34.54 billion (~$5.3 billion), ahead of the market’s forecast of $5.08 billion. EPS of $0.73 was also ahead of the Street’s forecast of $0.70 for the quarter.

During the quarter, revenues from China retail marketplace grew 35% to RMB 28,714 million (~$4,433 million) driven by mobile revenues that increased 192% to RMB 18,746 million (~$2,894 million). Revenues from China Wholesale marketplace grew 35% to RMB 1,162 million (~$179 million). Within the international business, retail marketplace revenues grew 14% to RMB 632 million (~$97 million) and wholesale revenues grew 18% to RMB 1,430 million (~$221 million). Alibaba’s cloud computing and Internet infrastructure business also continued to grow with revenues increasing 126% over the year to RMB 819 million (~$126 million). Other revenues fell to RMB 1,786 million (~$277 million).

Among operating metrics, it added 21 million active buyers to end the China retail marketplace user base to 407 million. Mobile monthly active users grew 47 million to 393 million at the end of the December quarter. Gross Merchandise Value (GMV) of goods transacted on its China retail marketplaces grew 23% over the year to RMB 964 billion (~$149 billion) with mobile accounting for 68% of the total volume. On Monday, Alibaba announced that it had crossed the milestone of 3 trillion yuan (~$463 billion) GMV of total transactions processed through its website.

Alibaba’s Rural Expansion

Alibaba plans to continue to deliver strong growth through added focus on domestic markets. After establishing a strong foothold in the urban markets, Alibaba realizes that the next wave of growth within China will emerge from the rural sectors. According to an eMarketer report, by 2019 China will add 139 million internet users to its pool of 407.6 million Internet users. The researcher estimates that a lot of these new users will come from less urban places as Internet reach continues to expand.

Alibaba expects the rural e-commerce market to be worth nearly $75 billion this year. The company already has a presence in the form of “Taobao villages” which are villages where at least 10% of the population makes its living by selling products online. Now, Alibaba, through its Internet finance firm – Ant Financial, is planning to invest $155 million to train over a million teenagers in rural China. The investment will help finance college graduates who want to return to their villages to set up businesses of their own.

Additionally, the company is setting up service stations where villagers can get online to order goods and then return later to collect shipments. It is investing 10 billion yuan (~$1.5 billion) to build 1,000 county-level distribution centers and 100,000 village-level drop-off points over the next three to five years. As of June 2015, Alibaba had already established 63 county-level centers and 1,803 village-level centers.

Alibaba’s International Expansion

But Alibaba is also counting on international expansion to drive future growth. And it is doing so by investing in local operations. Recently, Alibaba announced the acquisition of 5.6% stake in discount deal site Groupon. Analysts believe that the reason for Alibaba’s interest in investing in a dying company like Groupon is probably to better understand the workings of the US market. Alibaba has recently invested in other online businesses in the country as well including retailer, augmented-reality provider Magic Leap, and car-booking company Lyft. Access to Groupon could also help Alibaba gain a better insight into the workings of a group buying model.

Similarly, Alibaba bought 4% stake in South Korea’s top entertainment agency S.M. Entertainment. The $30 million investment will help Alibaba make inroads into South Korea’s music industry. Market rumors suggest that Alibaba is also looking to invest in Flipkart – India’s largest e-commerce player with 44% market share. Alibaba is already a stakeholder in another Indian e-commerce player – Snapdeal and owns a 40% stake in India’s mobile payment company PayTM. If Alibaba’s investment plans go through it could own a big share of the Indian e-commerce market indirectly.

Its stock is trading at $78.18 with a market capitalization of $191.2 billion. It touched a 52-week high of $95.06 in May last year. It has recovered significantly from the 52-week low of $57.20 it had fallen to in September last year.

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