Alibaba is currently about 30% off its all-time high
So is the stock a buy or a sell? I'll be diving deep into the company today to
help you make a decision What's up everyone my name is Ben and
welcome to rareliquid a channel where I draw from my experience as a former
J.P. Morgan investment banking analyst to create videos about tech investing and
career advice Now normally I post videos on Thursdays
and Sundays but because there's just so much to cover for Alibaba I'm gonna
actually be dividing up my coverage for the company into three separate videos
Today in Part 1, I'll first be discussing what Alibaba does,
go over a competitive analysis, and then talk about the bull and bear case
In Part 2, I'll be going over financials and valuation and what I'm
personally doing with the stock and in Part 3, I'll be going over my
DCF of the company after the company reports earnings on
August 3rd 2021 If you're new around here just to let
you know I am doing deep dive into a lot of different Chinese tech companies
that's currently the series I'm kind of working on and you can check out the
playlist right here if you want to see the other
companies that I cover now and also in the future. Two things
before I get started please first remember I am not a financial advisor so
please treat all content as for education and entertainment purposes
only and second of all, I do have a patreon
where if you want to follow my buy/sell alerts and things like that
then check it out you there's a link in my description down below
Alright so with that said first up, let's talk about what Alibaba does
The company's mission is to make it easy to do business anywhere and Alibaba's
vision is to be a good company that lasts
for 102 years. I know 102 just sounds completely arbitrary but basically
Alibaba chose to aim for 102 years because the company was founded in 1999
and so 102 years means that the company would span three different centuries
let's now go into the company's revenue and
the company reports in four main key segments. The first
is core commerce, which accounts for 87% of the company's revenue and can be
broken down into many smaller segments the first
is customer management which accounts for 43% of revenue and the two biggest
products here are Taobao and Tmall and each of these
are really important so let me dive a bit more into them
Taobao is kind of like Amazon and eBay put together where any individual or
business with a Chinese bank account can buy and sell products
In the past, there were a lot of issues with fake products on Taobao so Alibaba
has become a lot more strict on their regulations for what kind of products
can be sold on here On the other hand, Tmall is known as a
more legitimate platform where brands like Nike or Nintendo set up online
storefronts and sell to customers so if you buy on Tmall you know that
you're buying from a trusted source. You can go on Taobao and search for
virtually any product and oftentimes Tmall links are prioritized and are
marked by this red logo The second largest segment is an others
segment that accounts for 23% of revenue and many of the names you see
here like Sun Art, Tmall Mart, and Fresh Hippo are food delivery platforms
another five percent of revenue comes from international commerce which as
we'll discuss later is a key part of Alibaba's future growth strategy
Then another five percent comes from Cai Niao logistics and I'm not sure if I'm
pronouncing that correctly but you can think of this as
similar to Amazon fulfillment where Alibaba has huge warehouses where it
stores products for businesses and earns money delivering orders to
customers. The last one I want to point out here is wholesale which accounts for
four percent and this is probably the Alibaba that most Americans know
Alibaba's second revenue segment is Cloud Computing and this accounts only
for eight percent of Alibaba's revenue but later on in the bull case section of
the video we'll discuss why this segment is so
important for Alibaba Alibaba's third segment is digital media
and entertainment and in here is YouKu which is a streaming
service you see which is an internet browser and Alibaba pictures which
produces films The last segment here is innovation
initiatives and others which include amap.com which is like google maps and
DingTalk which is something like slack Lastly,there is another segment that
Alibaba doesn't report because it owns a minority stake which is pretty important
to Alibaba's whole story and that's Ant Financial Group
Alibaba owns 33% of the company and Ant Group owns Alipay which was the primary
way that almost all consumers in China paid for digital goods and services
until WeChat pay came along. As you can see here you can pay for almost anything
with the two apps but you can't use WeChat pay for Taobao and Tmall because
they're owned by Alibaba and you can't use Alipay for JD which is
backed by Tencent Alibaba and Tencent are fierce
competitors who are constantly at war with one another and if you'd like to
learn a little bit more about Tencent then make sure to check out this video
over here Next up let me briefly go over a
competitive analysis In this section, I'll only be going over
Alibaba's e-commerce and cloud computing segments because those really are the
most important ones for the company For commerce, Alibaba's two main
competitors are JD and Pinduoduo and as you can see from this chart the
two of them have been increasing share over the past few years. JD
is known for offering a more premium service because they actually buy the
products from businesses, store them in warehouses, and deliver
products themselves. So because JD owns their entire process they're able to
offer a more premium service to their customers
and another thing to note about JD's growth that's really important is that
it's backed by Tencent like I mentioned earlier and so Tencent
which made an investment in the company is really incentivized to push JD
forward and so for example on WeChat you can buy
a lot of things through JD.com while you can't
use Taobao or Tmall because obviously those are owned by Alibaba
Pinduodo started off focusing on e-commerce for third and fourth-tier
cities but since then has expanded to China's
major cities as well The company is known for its innovative
marketing tactics and also something called group buy which is where you and
a friend or many other people can buy as a group so you can get a discount on the
products you buy So the competition for e-commerce in
China is getting very fierce but when I spoke to a few friends who
live in China they said that they still mainly just use Taobao because it just
has the widest selection and a lot of brand recognition
For cloud computing, Alibaba's two main competitors are Huawei
and Tencent. Huawei is known to have a very strong relationship with the
government and a lot of their cloud revenue comes from the government
Tencent is known to have a lot of the basic foundational tools needed for most
companies but right now does not have as robust an
offering as Alibaba Overall for cloud, the general sentiment
is that Alibaba has the best set of offerings and has a huge lead right now
in the market and I think this will be a huge growth
driver for the company moving forward This actually leads us to the next part
of the video which is the bold case for Alibaba
The first reason to be bullish on Alibaba is that it dominates in
e-commerce As of 2020 Alibaba owns 29% of the global
ecommerce market and as we all know covid also helped accelerate the growth
of e-commerce in the past one to two years
What's also scary is that Chinese smartphone penetration is only around 63%
which means that many more users are still left to be captured
In addition, the average income in China is also increasing as the country gets
richer and richer, meaning the average order amount will be
increasing on Alibaba's e-commerce platforms. The second reason to be
bullish is Alibaba's opportunity in cloud computing
Many people know that most of Amazon's revenue comes from e-commerce but most
don't know that the vast majority of the company's profits actually come from AWS
their cloud computing platform which contributes 12% of revenue but 59%
of operating income. This is because ecommerce is a scale play and a pretty
low margin business where you may be making a few cents per order when you
get to the scale of something like Alibaba
or Amazon, while cloud computing is revenue that's more reoccurring,
much more higher margin, and that's why you also see more software and cloud
computing type companies trade at higher multiples and also have higher margins
As the cloud market continues to mature and grow in China Alibaba is best
positioned to take the most share with the strongest product offering
A third reason to be bullish on Alibaba is international expansion
In Alibaba's latest earnings call, CEO Daniel Zhang stated globalization to be
one of his top three priorities Currently Alibaba has 240 million
international users and they're aiming to double that figure in the future
If any of you guys have ever looked into drop shipping if you don't live in China
maybe in the states or Europe or something like that
then you probably know that the only option you pretty much have for
wholesale where you can really easily contact and
producer or manufacturer and they can send you samples and you can kind of
build a business from scratch, the best way to do that is through Alibaba
especially if you have scale I actually personally looked into drop
shipping many many years ago, spent a lot of months
doing a lot of research and thinking about producing
in China or manufacturing, I mean sending all the products to
Amazon fulfillment, and then having them fulfill all the orders and selling on
Amazon and doing all that stuff, I personally I kind of realized that the
margins probably were not worth it due to my small scale and so
yeah I do have some experience working with Alibaba- I was surprised to learn
that international commerce was only four percent
of the overall company's revenue but that just also kind of shows that
the company has a lot more room to grow with its international expansion and I
think their plans in the future will really
help boost the company's growth in the future as well
Before moving on to the next part of the video I did want to let you guys know
that I do offer a free daily newsletter that provides information about the
stock market, crypto markets, and economic news
and feel free to check that out in the description below. Okay, next up let's
talk about the bear case for Alibaba The first key risk is Alibaba's
relationship with the Chinese government as you may already know Jack Ma made
infamous headlines last year when he made a speech saying that China's
regulatory system stifled innovation Two days before launching, Chinese
regulators suspended and financial's 37 billion dollar IPO and there's also some
talk that Jack Ma actually knew this was coming
and that's why he made the remarks that he did. Then earlier this April Alibaba
was hit with a record 2.8 billion dollar fine for monopolistic practices
So as you can see Alibaba is skating on some pretty thin ice with the Chinese
government and this will be a continuous risk for the company as it is for a lot
of other Chinese companies but Alibaba at least for now kind of has a spotlight
on it and especially for anti-trust
regulations and things like that it's a pretty important risk to be aware
of for Alibaba. A second key risk revolves around Alibaba's future
investments Alibaba CFO Maggie Wu stated in the
latest earnings call that Alibaba will be investing its incremental profit
into its business. Now a company investing in its business shows a lot of
confidence that the company has in its strategy and what it's investing
in and its overall business and so this is not necessarily a bad thing-
what I'm just saying is that you do want to monitor Alibaba's investments over
time because if your company or Alibaba in this case
were to invest in an industry that loses a lot of cash or is just has a ton
of competition like for example if Alibaba was to create
games and really go super strong into the gaming industry where
Tencent really dominates right now in China in the Chinese market and just
overall in the world then I would say that that would be something you would
really want to be monitoring very closely and you might
be a little bit worried if Alibaba were to do something like that so
generally what I'm just saying is that you want to be up to date with what
Alibaba is investing in and make sure that you're keeping
you know pretty regularly updated about the progress of its investments
The third important risk is that Alibaba is structured under
a variable interest entity or a buy Basically what this means
as a US buyer is that you aren't actually buying shares that give you
ownership of Alibaba when you buy stock and instead you're buying shares of a
shell company based in the Cayman Islands
Later on I'll be making a video that dives deeper into this whole structure
and why I'm personally not super super worried
about it but basically what you do need to know is that
for whatever reason if the Chinese government starts to just say that we
don't recognize these kinds of structures or somehow
creates a law or ruling that really hurts this
structure and for example just kind of dissolves
advise or says that it's illegal for these companies
in China to have these kind of structures then this is a huge risk for
the company Okay so with that said this actually
concludes part one and part two will be coming out tomorrow where I talk about
financials and valuation and what I'm personally doing with the
stock and my viewpoints about the company
If you want buy/sell alerts to see in real time when I'm entering into stocks
like Alibaba or maybe I'm not then make sure to check out my patreon
down in the description below I also wanted to let you know that I'm
giving away five percent of my July 2021 revenue if you look for this picture on
my instagram and I also give $10 away to the first
commenter and a random commenter and here are our winners today
if that's you then just message me on instagram with that said thank you so
much as always for watching and tuning in hope to catch you in the next one
thanks so much and peace out [Music]