Summary
- Recent earnings report of Alibaba Group Holding Limited shows a rapidly growing international commerce business with year-on-year growth of 26%.
- Geographical diversification of Alibaba’s revenue base is a bullish trend for the company as it removes some of the regulatory and growth challenges faced in China.
- Alibaba’s Lazada is showing rapid growth in Southeast Asia while Trendyol has become a leading ecommerce player in Turkey.
- Success of Alibaba’s subsidiaries in these regions could show the strength of Alibaba’s business model and the ability to replicate it in other important markets.
The Alibaba Group Holding Limited ( BABA ) recent fiscal Q3 earnings report showed very strong performance in key international markets. The International commerce retail segment had 26% YoY revenue growth compared to negative 1% growth in the China commerce segment. The revenue share of international commerce has increased to 8%. Growth in international regions is very important as Alibaba faces a saturated market and greater regulatory scrutiny in China.
Alibaba’s Lazada has seen rapid growth in Southeast Asia, where it is one of the top players in the ecommerce industry. Alibaba also has a majority stake in Trendyol, which operates in Turkey and has gained a massive market share in this region. Funding from Alibaba has also helped these subsidiaries perform better than the competition. Growth of these international operations shows strength of Alibaba’s business model and the flexibility within the company to function in diverse geographies with different regulations. Expansion in new international markets will be one of the key drivers for future growth in Alibaba stock and it should also remove some of the fears due to headwinds in China.
Importance of international markets
The rapid growth of Alibaba in China in the last few years was inevitably going to lead to saturation in this market. The annual active customers on Alibaba’s platforms are already close to 1 billion and it is likely that we would not see any major growth in the customer base in China. Hence, the next driver for Alibaba would be international regions where it is trying to replicate its business model. The total international commerce revenue was $2.8 billion in the recent quarter, which is equal to more than $10 billion on annualized basis. This made up 8% of the total revenue base of Alibaba.
Figure 1: Rapid growth in international commerce compared to slower growth in home market. Source: Company data .
International commerce retail segment reported 26% YoY growth, which is one of the highest revenue growth businesses within Alibaba. Most of the contribution is due to Lazada in Southeast Asia and Trendyol in Turkey.
Advantages of Alibaba in international regions
Alibaba has significant advantages in several international regions. The company can provide massive and sustainable funding to its international operations which allows them to overtake smaller local operators. The international operations also benefit from well-built technological platform of Alibaba which reduces the investment needed to build new platform from scratch. A good example is Lazada in Southeast Asia, which is facing lower competition from Sea Limited ( SE ).
Figure 2: Key metrics of Sea Limited in the last few quarters. Source: Ycharts .
Sea Limited has market leadership position in Southeast Asia and is the chief rival of Lazada. Wall Street gave the company a higher valuation as long as its revenue growth was strong. However, slowdown in revenue growth and further increase in losses in the last few quarters has led to a staggering decline of over 80% in Sea Limited’s valuation. The company has a market cap of $33 billion compared to $200 billion at its peak.
The decline in Sea Limited’s valuation will limit the ability of the company to raise new funds. It will also force the company to reduce discounts on its platform which should reduce the competitive pressure on Lazada. At the same time, Alibaba invested over $1 billion in Lazada in 2022 alone. Lazada can rely on long-term sustainable funding from Alibaba, which gives it a massive edge against Sea Limited and should allow it to gain market share in this region.
A similar factor has played with Trendyol in Turkey. Trendyol which is majority owned by Alibaba has been able to overtake other local rivals in several categories. Ecommerce business requires deep pockets and good technological platform. This should force consolidation in many international regions. Alibaba could become one of the key ecommerce players in several important international markets over the next few years.
Europe is the key
Alibaba has seen stiff resistance from regulators in India after a border skirmish between China and India in mid-2020. This led to the divestment of almost all the investments made by the company in this region. It is unlikely that Alibaba would make any significant inroads into U.S. due to current geopolitical tensions. This makes Europe the most important market available for Alibaba to expand its operations. Alibaba Cloud has already built several data centers in Europe. Most of the European regulators are more open to Alibaba as it helps them balance the rapid growth of U.S. tech giants like Amazon ( AMZN ), Microsoft ( MSFT ), Google ( GOOG ), and others.
Alibaba can expand in Europe through Lazada or by buying out some of smaller local players. It is likely that Alibaba will have to face more formidable competition in Europe due to the presence of Amazon and other big retail giants like Aldi, Lidl, Carrefour and others. However, Alibaba has an advantage due to its expertise in ecommerce business and the success it has seen in other international regions. This should help the company in establishing good logistics and create a niche for its own ecommerce platform.
Impact on Alibaba stock
International growth will become the biggest tailwind for Alibaba in the next few years. The growth runway in this category is huge as the company expands in new markets. It will also allow the company to diversify its revenue base and limit any damage from negative regulatory environment in China. The success in Southeast Asia and Turkey shows that Alibaba’s management can be flexible in building a platform that caters to local customers.
Alibaba’s international business contributed 8% of the total revenue base in the latest quarter. At the current growth trends, it should easily reach over 20% of the revenue base in the next five years. Over the next decade, the contribution from international operations could eclipse business within China. This will allow the company to become a global player and also gain better margins for important segments like Alibaba Cloud.
Figure 3: Alibaba’s forward P/E ratio in comparison to JD and PDD. Source: Ycharts .
Alibaba is trading at a lower forward P/E ratio compared to other competitors like JD.com, Inc. ( JD ) and Pinduoduo ( PDD ) despite Alibaba having a better international presence. It is likely that in the short term, Alibaba would need to invest heavily in building logistics in international regions. However, this will also help in improving the growth runway for the company and gaining market share. We have already seen the success of this strategy in Southeast Asia where Lazada could soon overthrow Sea Limited from the market leadership position. Long term investors should look at the growth potential of these international operations and the advantage it gives in terms of geographical diversification.
Investor Takeaway
Alibaba Group Holding Limited has reported a much higher international retail growth compared to its China operations. The revenue share of international operations is 8% and could soon become a sizable number as the company expands in new regions. Alibaba also gains from international expansion by reducing the headwinds due to regulatory environment in China. The company can invest surplus cash in international markets instead of focusing on China where it has already saturated the ecommerce industry.
Alibaba Group Holding Limited stock is trading at less than 12 times the forward P/E ratio, which is lower than other peers in China like JD and PDD. Both these competitors do not have the scale of international presence that Alibaba has built. Lucrative markets like Europe could also improve the margins for the company and provide a much more predictable regulatory environment for the management. These factors should help Alibaba Group Holding Limited stock gain a strong bullish sentiment in the next few quarters as the revenue share of international business increases.
For further details see:
Alibaba: Diversification Can Launch Next Bull Run