How to Invest in The Amazon of China
It’s always a good laugh hearing the D&I charlatans talk about “Asians,” as if that’s an appropriate way to group nearly 60% of the world’s population. There are actually five distinct regions in Asia containing 48 different countries. One in four people on this planet is Southeast Asian, hailing from places like India, Pakistan, and Bangladesh. Just over one in five people on this planet is Eastern Asian, with the vast majority of those people living in China.
If you’re invested in a company that only does business in the United States, your total addressable market (TAM) is 4.2% of the world’s population. If you’re invested in a company that does business in China, your TAM is just over 18% of the world’s population. All things being equal, you’d expect that the Amazon of China will eventually be four times the size of the Amazon of the United States. Of course, that example assumes neither company sells internationally. (Amazon has about 29% international sales, a number that’s been falling for ten years straight.) The point is, the Amazon of China has a whole lot of potential.
The most successful businessman in the world might be Jack Ma, a man who bought his first computer at the age of 33 and still doesn’t even know how to code. When venture capitalists didn’t throw money at his brilliant idea, he didn’t get on Twitter and complain about how not enough people in VC looked like him, he bootstrapped his company with $20,000 his wife and friend helped him raise. Based on his net worth today of $48 billion, he showed a return of +240,999,900% on that original investment with the success of his company – Alibaba (BABA). He recently retired from the company and sold some shares, so we decided to see what they’ve been up to.
The Amazon of China
The Chinese get a lot done because they don’t allow workers to engage in activities that waste a tremendous amount of time, things like Facebook, Twitter, and D&I workshops. They also don’t have Amazon, at least as of last April. Said an article by CNBC about the demise of Amazon China:
Amazon is shutting down its domestic e-commerce marketplace business in China. The U.S. firm said it will focus on “cross-border” selling to Chinese consumers. Amazon has faced stiff competition from Chinese e-commerce giants Alibaba and JD.comCredit: CNBC
In order to put things into perspective here, let’s do some basic comparisons between Amazon and Alibaba. Here’s a look at revenues for the two firms over the past ten years:
Back of the napkin math shows Amazon’s revenues have a ten-year compound annual growth rate (CAGR) of around +30% while Alibaba’s CAGR is around +60%. When you’re investing in disruptive technology stocks, you absolutely need to see double-digit revenue growth. Profits are optional as they can come later. While both companies happen to be profitable, Alibaba happens to be quite profitable.
Now here’s a look at market cap for both companies:
We can’t just conclude that Alibaba offers better value because it has a smaller market cap, or because it’s more profitable, or because revenues are growing quicker. We can’t say they’re a better company by comparing them to Amazon across any dimension. In the words of American philosopher, Jordan Petersen, “compare yourself to who you were yesterday, not who someone else is today.” So, who is Alibaba?
Who Is Alibaba And What Do They Do?
Around 85.8% of Alibaba’s revenues come from “core commerce” which we will break down into categories along with the percentage contribution to overall revenues in 2020.
China Commerce Retail (65.3%)
There is no eBay in China. Instead, you have Taobao Marketplace, China’s largest mobile commerce destination with a large and growing social community. Similar to eBay, individuals and small businesses use the domestic marketplace to sell things to each other. In the below screenshot, you can see how Taobao acts as a gateway to other marketplaces and services as well:
Alongside Taobao is Tmall, the world’s largest third-party online shopping and mobile commerce platform for brands and retailers. This is what Amazon users might identify as being most similar to Amazon. In 2020, Chinese sellers transacted over one trillion dollars of goods across Taobao and Tmall, each commanding about half that number. In place of Alexa you’ll find Tmall Genie, the No. 1 smart speaker in China by shipments in 2019.
China Commerce Wholesale (2.65%)
Alibaba’s B2B commerce platform in China is 1688.com which connects wholesale buyers and sellers across a wide range of categories. Also under this umbrella is Ling Shou Tong which reinvigorates mom-and-pop stores with a digital makeover, allowing them to sell a greater selection of products. It’s a great way to make life easier for the 80% of shop owners over the age of 45 who aren’t necessarily aware of the latest retail technologies.
International Commerce Retail (6%)
In this bucket, you’ll find Lazada, a leading and fast-growing e-commerce platform in Southeast Asia which serviced 70 million unique customers last year. More than 75% of Lazada’s parcels went through its own facilities or first-mile fleet during the same period. There’s also Trendyol, a leading e-commerce platform in Turkey, and Daraz, a leading e-commerce platform across South Asia with key markets in Pakistan and Bangladesh.
International Commerce Wholesale (2.5%)
Here’s where you’ll find the B2B marketplace some might think of when we hear the name Alibaba. The Alibaba.com website sourced business opportunities or completed transactions in approximately 190 countries last year.
Cainiao Logistics Services (4.4%)
Offers domestic and international one-stop-shop logistics services and supply chain management solutions. Consumers can pick up their packages at Cainiao Post, a network of community stations, campus stations, and smart pickup lockers. (Sound familiar?) Consumers can also schedule pickups of packages for delivery within two hours.
Local Consumer Services (5%)
Some sort of vaguely described mobile technology platform that powers some of their other apps like on-demand delivery, restaurant and services guides, and an online travel platform. (Sounds similar to how Indonesia’s GoJek used their platform to expand into dozens of other verticals, though recently they’ve had to tone that back and refocus on core competencies.)
Lastly, there’s an “other” bucket which accounts for just 1.8% of total revenues. That concludes the segments to be found within the “core commerce” business of Alibaba which constitutes 85.8% of its revenues. With a 38% profit margin, it also drives its profits, acting as a cash cow to fuel the growth of other business segments – like cloud computing.
Cloud Computing (7.8%)
Just two years ago, this division only made up 5% of total revenues. Today, that’s nearing 8%. According to a recent report by Gartner, Alibaba is the world’s third-largest cloud computing provider by revenue. They’re also the largest public cloud service provider by revenue in China.
Digital Media and Entertainment (5.3%)
Includes Youku, the third-largest online long-form video platform in China in terms of monthly active users in March 2020. Also includes Alibaba Pictures, an Internet-driven integrated platform that provides services to the entertainment industry.
And there you have it. Just to review what Alibaba does, their primary segments are:
- Core Commerce – 85.8%
- Cloud Computing – 7.8%
- Digital Media and Entertainment – 5.3%
- Other 1.4%
It’s also worth noting that Alibaba owns 33% of Ant Financial, a unicorn you can read more about in our piece on The Biggest Fintech Company in The World.
The Risks in Alibaba Stock
We constantly preach to our readers about the importance of diversification because of something called “company-specific risk.” What happens to the stock price if suddenly the CFO is caught fudging the numbers? That’s more common in Chinese companies than you might think. Some of the debacles you’ll find over there make Enron look socially responsible. Any number of things can go wrong internally at Alibaba, and there are also external concerns.
Alibaba’s filing cites the Chinese government as a risk. Given that 65% of the company’s revenues come from Chinese retail commerce, that’s a formidable risk. Rumors have been flying around Jack Ma’s resignation and the possible involvement of the Chinese government. As for China’s ongoing trade war with ‘Murica, that doesn’t seem to impact BABA much given that international commerce accounts for about 7% of revenues.
As for competition, Alibaba pretty much dominates online retailing in China with a nearly 56% market share.
In case you’re wondering, Amazon has about 38.7% of retail ecommerce share in the United States followed by Walmart at 5.3%. The fact that both online retailers dominate in their respective countries is perhaps the most compelling fact to point to when making the case that Alibaba is “the Amazon of China.”
We’ve been longtime shareholders in BABA, solely on a belief in Jack Ma’s ability to execute. It sucks that he’s gone, but he built the company to last for 102 years, so fingers crossed. Alibaba’s domination of a market with one-fifth the world’s population is the sort of economic moat Warren Buffet might fawn over. An interest in international expansion means less exposure to a single market and even more opportunities for growth in the future.
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